UK R&D Tax Credits — Complete Guide for Small Tech and Software Companies (2026)

The Two Schemes Post-August 2023 Reform

HMRC reformed the R&D tax credit schemes significantly from accounting periods beginning on or after 1 April 2023. The old landscape (SME Scheme and RDEC) has been replaced by:

• The merged scheme (for most companies from April 2024):
• Rate: 20% above-the-line credit (RDEC — Research and Development Expenditure Credit)
• Available to: most companies — previously both SME and large company schemes, now unified
• Payable or offsetable against CT liability

• The SME Intensive Scheme (for qualifying R&D-intensive SMEs):
• Rate: 27% credit (for companies where qualifying R&D spend ≥ 40% of total expenditure)
• Available to: SMEs meeting the intensive test AND loss-making companies
• Applies from April 2023 onwards

The old SME scheme (pre-April 2023): For historical claims relating to periods before April 2023: the old SME scheme (186% enhanced deduction for most SMEs, 230% for loss-making SMEs claiming payable credit) still applies.

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What Qualifies as R&D?

HMRC defines qualifying R&D as work that: 1. Seeks to achieve an advance in science or technology (not just an advance in the company's own knowledge) 2. Resolves scientific or technological uncertainty — the route to solving the problem is not obvious to a competent professional in the field 3. Has a qualifying purpose — directly advances science or technology, or enables future advance

• What this means in practice for software companies:
• ✅ Developing a new algorithm that solves a problem in a novel way
• ✅ Building software to handle data at scale in a way not previously demonstrated
• ✅ Creating AI/ML models that advance the state of the art
• ✅ Developing new APIs or protocols that solve technical uncertainties
• ❌ Routine bug fixing
• ❌ Adding features to existing software that use established techniques
• ❌ UI/UX redesigns
• ❌ Implementing known technologies for a new use case (using React for a new website)

The key test: is there genuine technological uncertainty about whether the goal can be achieved, and about the approach required? If your senior developer would confidently say "yes, I know exactly how to build this" from the start — it's likely not qualifying R&D.

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Qualifying Costs

• Staff costs (largest category for most companies):
• Salaries, employer NICs, employer pension contributions for employees directly engaged in R&D
• Allocation basis: time spent on qualifying R&D activities. A developer spending 60% of their time on qualifying R&D → 60% of their total employment cost qualifies

• Subcontractor costs:
• 65% of subcontractor costs for qualifying R&D work (merged scheme)
• The subcontractor must not be connected to the company (related parties have restricted treatment)
• Must have a genuine R&D contract, not just a general IT services contract

• Software and cloud computing costs:
• Software directly used in carrying out R&D
• Cloud computing costs (AWS, Azure, GCP) attributable to R&D activities
• Must be used directly for R&D — general IT infrastructure does not qualify

• Consumable items:
• Materials consumed or transformed in the R&D process (more relevant for hardware/physical product development)

• Costs that do NOT qualify:
• Capital expenditure (equipment, servers — claim capital allowances instead)
• Rent and overhead (not directly qualifying under the merged scheme)
• Marketing and sales staff

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How to Claim

Method 1: Include in CT600 R&D claims are made on the CT600 return for the accounting period. File within the normal CT filing deadline. The credit (20% RDEC or 27% intensive) reduces your CT liability; any excess is payable as cash.

Additional notification requirement (from 1 August 2023): New claimants and those who haven't claimed in the previous 3 years must submit an Additional Information Form (AIF) to HMRC before or at the same time as the CT600. The AIF requires: description of qualifying projects, details of qualifying expenditure, contact details for the R&D claim. This is a new requirement — failure to submit AIF invalidates the claim.

Method 2: Use an R&D specialist Specialist R&D tax consultancies handle the technical narrative (describing the qualifying R&D to HMRC's satisfaction) and financial calculation. Fee: typically 15–25% of the credit value (contingency-based). Worth considering if your R&D is complex or if you haven't claimed before.

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HMRC's Increased Scrutiny

• From 2022 onwards, HMRC significantly increased compliance activity on R&D claims — driven by widespread abuse (some advisory firms submitting fraudulent claims, legitimate claims being inflated). Key changes:
• Mandatory AIF pre-notification
• Named officer requirement (an officer of the company must sign the claim)
• HMRC now routinely issues "compliance checks" (enquiries) on R&D claims — particularly for first-time claimants and claims above certain thresholds
• Penalties for incorrect claims: HMRC applies penalties based on the carelessness/deliberate nature of errors

• Protect yourself:
• Maintain a contemporary record of R&D activities (project logs, meeting minutes, technical documentation)
• Have clear evidence of the technological uncertainty at the project's start
• Get the technical narrative reviewed by someone who understands HMRC's qualifying criteria
• Use a reputable R&D specialist if the claim is material

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FAQs

How far back can I claim R&D tax credits? Claims must be made within 2 years of the end of the accounting period to which they relate. If you qualified in financial year 2023 but haven't claimed: you can still claim for 2023 if within 2 years.

What is the minimum R&D expenditure worth claiming for? No statutory minimum, but professional fees for a specialist mean small claims (under £50,000 qualifying spend → under £10,000 credit) may not be cost-effective to claim with a specialist. Self-filing with robust documentation is appropriate for smaller claims.

Can a pre-revenue startup claim R&D credits? Yes — and this is where the payable credit is most valuable. A loss-making startup with qualifying R&D expenditure can receive a cash payment (payable credit) rather than a CT offset. Under the merged scheme: 20% credit, with the net payable credit approximately 16.2% after PAYE cap adjustments. This can be a meaningful source of cash for early-stage tech companies.

What is the PAYE cap? The payable R&D credit is capped at 3× the company's total PAYE and NICs liability for the year. This prevents shell companies with no employees from claiming large R&D payable credits. For companies with genuine employees (which most qualifying R&D companies have): the PAYE cap rarely bites.

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