Claiming R&D tax credits: What you need to know

Research and Development (R&D) tax relief remains one of the most valuable incentives for innovative UK companies, but it has never been more tightly regulated.

HMRC’s latest statistics show that around 46,950 R&D tax credit claims were made for the 2023/24 accounting period, representing a 26% decrease from the previous year, even though total relief still amounts to approximately £7.6 billion. In other words, fewer businesses are claiming, but those that do are claiming more and facing greater scrutiny.

Let’s explore how the current regime operates and what you need to get right to ensure a claim that withstands HMRC’s scrutiny.

Why R&D claims are under increased scrutiny

Several changes explain why some businesses are stepping back from claiming R&D tax credits:

• Reduced SME rates and stricter rules in recent years have diminished the benefit for some companies, shifting more activity into the large company-style regime.
• Mandatory additional information forms must now accompany every claim. If you have not submitted this form before or simultaneously with your company tax return, HMRC will reject the claim outright.
• Pre-notification requirements mean first-time claimants, or those who have not claimed for over three years, must notify HMRC of their intention to claim within a specified window or forfeit relief for that period.

Against this backdrop, our view is clear: R&D tax relief remains well worth claiming, but it must be treated as a structured project, not a last-minute addition to the tax return.

Who can claim R&D tax relief now?

From accounting periods beginning on or after 1 April 2024, the previous SME and RDEC schemes are replaced by:

1. The merged R&D expenditure credit scheme
   • A single 20% expenditure credit for qualifying R&D costs.
   • The credit is taxable, so the net benefit for many profit-making companies is roughly 15–16% of qualifying expenditure.
   • Available to companies of all sizes within the Corporation Tax that undertake qualifying research and development activities.
2. Enhanced R&D Intensive Support (ERIS) for loss-making SMEs
   • Loss-making SMEs that spend at least 30% of their total expenditure on qualifying R&D can access a more generous regime.
   • ERIS offers a 186% deduction plus a payable credit of up to 14.5% of surrenderable losses, delivering an effective cash benefit of up to around 27% of eligible R&D costs.

If your accounting period started before 1 April 2024, you may still fall under the previous SME/RDEC rules, but any forward-looking claims will be governed by the merged scheme or ERIS.

What counts as research and development?

HMRC applies a technical definition based on scientific or technological uncertainty. In practice, qualifying projects typically:

• Seek to achieve an advance in a field of science or technology, not merely improve existing products or processes in a routine manner.
• Face technological uncertainty where a competent professional could not readily determine the solution at the outset.
• Follow a systematic process of testing, trialling, or experimentation to resolve those uncertainties.

Typical qualifying areas include:

• New or improved software or digital platforms.
• Advanced manufacturing processes and automation.
• Product formulation in sectors such as engineering, life sciences, or food and drink.
• Data analytics, cloud computing, and certain mathematics-based work have now been explicitly brought into scope under the reformed rules.

A significant change for future-proof planning is that, for most companies, overseas R&D costs generally do not qualify, with limited exceptions. Hence, keeping research and development activities within the UK is more important than ever.

Key steps to making a strong claim

We usually structure a robust claim process around these stages:

1. Confirm eligibility early
   • Map your projects against HMRC’s definition and the DSIT guidelines.
   • Check whether you qualify as R&D-intensive (meeting the 30% threshold) if you are loss-making.
2. Protect your position with pre-notification
   • If you are a first-time claimant or have not claimed for more than three years, notify HMRC within six months of the end of your accounting period using the claim notification process.
3. Build a clear technical narrative
   • Identify key development projects and write concise explanations of:
     • The scientific or technological advance you were seeking,
     • The technological uncertainties you faced, and
     • How you attempted to overcome them through applied research and development activities.
   • Ensure these explanations are written for a tax inspector, not just an engineer.
4. Capture qualifying expenditure accurately

   Typical qualifying costs include:

   • Staff costs (including relevant National Insurance contributions and pension).
   • Externally provided workers.
   • Consumables and certain software, data, and cloud costs.
   • Some subcontracted R&D is subject to specific rules under the merged scheme.
5. Complete the additional information form
   • This must be filed before or simultaneously with your company tax return and must match the figures in your CT600.
6. Submit your claim through your corporation tax return
   • All claims are made or amended through the company tax return for the relevant accounting period.

Common pitfalls to avoid

Based on HMRC data and recent enquiries, several issues warrant close attention:

• Weak or generic project descriptions – claims that fail to clearly explain the scientific or technological advance and uncertainty are more likely to face questions.
• Missing pre-notification – failure to notify HMRC when required invalidates the claim, regardless of the technical merits.
• Overclaiming routine work, such as standard software configuration or minor product tweaks.
• Ignoring the PAYE cap – your payable credit is limited to £20,000 plus 300% of your PAYE and National Insurance bill, unless you qualify for an exemption.
• Poor record-keeping – HMRC increasingly challenges unsupported estimates, especially following periods of high fraud and error in the schemes.

With enquiries and compliance checks on the rise, a “light touch” claim can easily cost more in time and risk than it saves in fees.

How we can help

R&D tax relief remains a powerful tool for funding innovation, but now demands careful planning, thorough record-keeping, and a clear technical narrative that aligns with the latest HMRC guidance.

We work with clients to assess eligibility, model the benefit under the merged scheme or ERIS, prepare detailed technical and cost analyses, and support any HMRC enquiries that arise. Our goal is simple: a claim that is accurate, defensible, and aligned with your wider tax position.

At Cottons, we advise businesses across the UK on claiming R&D tax credits as part of our wider corporate tax and advisory services.