R&D Tax Credits Explained: The UK Rules in 2026

What Are R&D Tax Credits?

R&D tax credits are a Corporation Tax relief for companies that spend money trying to solve technical problems nobody has a ready answer to. Spend qualifying money on research and development and you either reduce your tax bill or, if you are loss making, receive a cash payment from HMRC.

Only companies can claim. Sole traders and partnerships cannot, which is one of the genuine tax reasons to think about incorporating if you are doing technical development work.

The relief has changed more in the last three years than in the previous twenty. Two schemes became one, the rates moved twice, a set of new administrative gates appeared, and the amount of money involved fell substantially. A lot of what you will read online, including material published by firms that sell R&D claims for a living, still describes rules that no longer apply. This guide sets out where things actually stand in 2026.

Which Scheme Applies to You

For accounting periods beginning on or after 1 April 2024, the old separate SME and large company schemes are gone. There are now two routes:

The merged scheme. This is the default for almost everyone, of any size. It works the way the old RDEC scheme worked: you get an above the line expenditure credit of 20 percent of your qualifying R&D spend. The credit is itself taxable, which is why the headline 20 percent is not what lands in your bank account.

Enhanced R&D Intensive Support, or ERIS. This is a separate, more generous route for loss making SMEs whose R&D spending is at least 30 percent of their total expenditure for the period. It keeps the old SME mechanics: an extra 86 percent deduction on top of the 100 percent you already get, and the ability to surrender the resulting loss for a cash credit at 14.5 percent.

If your accounting period began before 1 April 2024, the old rules still apply to it, and you may still be within time to claim. That matters more than it sounds, because a company with a March year end only moved onto the new rules from its year ending 31 March 2025.

What It Is Actually Worth

This is where the marketing and the arithmetic part company. Three worked examples, each on £200,000 of qualifying R&D spending.

A profitable company under the merged scheme. The 20 percent credit is £40,000. That credit is added to taxable profit and taxed at the main rate of 25 percent, so £10,000 goes back in tax, leaving a net benefit of £30,000, or 15 pence per pound spent.

A loss making company under the merged scheme. The credit is still £40,000, but the notional tax applied is the 19 percent small profits rate rather than 25 percent. That leaves a net benefit of £32,400, or 16.2 pence per pound. Slightly better, and payable in cash.

A loss making, R&D intensive company under ERIS. Say total expenditure for the period is £500,000, of which £200,000 is R&D. That is 40 percent, comfortably over the 30 percent threshold. The enhanced deduction is 186 percent of £200,000, or £372,000. Surrendered at 14.5 percent, that produces £53,940 in cash, or 26.97 pence per pound.

So the honest summary is: most claimants get 15 to 16.2 percent. The "up to 27 percent" you see on the websites of R&D specialists is real, but it applies only to loss making SMEs that spend at least 30 percent of everything they spend on research and development. That is a small minority of companies, mostly early stage software and biotech businesses with no revenue yet.

For scale, a loss making SME claiming before 1 April 2023 received 33.35 pence per pound. The same company today, if it is not R&D intensive, gets 16.2 pence. The relief has roughly halved and a great deal of the advice still in circulation was written when it had not.

What Counts as R&D for Tax Purposes

This is the part most companies get wrong, in both directions. Some assume they cannot possibly qualify because they are not a laboratory. Others assume that anything new to their business counts.

The statutory test, set out in guidelines issued by the Department for Science, Innovation and Technology, has two limbs:

1. The project must seek an advance in the overall field of science or technology, not merely an advance for your company.
2. It must do so by resolving scientific or technological uncertainty that a competent professional working in the field could not readily resolve.

Both words matter. Overall field means that if the solution is already known and published, reimplementing it is not R&D no matter how hard it was for your team. Competent professional means the benchmark is a capable practitioner in that discipline, not your most junior developer.

What this rules in, more often than companies expect:

• Making existing technology do something it was not designed to do, where nobody knows in advance whether it will work
• Integrating systems where the interaction creates genuine technical unknowns
• Process engineering that materially improves yield, speed or tolerance in a way the industry has not solved
• Work that failed. A project that did not succeed is often the strongest evidence that real uncertainty existed

What it rules out, more often than companies hope:

• Building a website, an app or a database using established techniques, however commercially novel the product
• Cosmetic or user interface work
• Market research, business process change and routine testing
• Simply being the first company in your sector to adopt something other sectors already use

Since April 2023 pure mathematics counts as science for this purpose, which brought a lot of algorithmic and data science work inside the definition. The arts, humanities, social sciences and economics remain outside it.

One practical point that carries real weight with HMRC. The technical narrative supporting a claim should read as though an engineer wrote it, because an engineer should have. The claims we see fall apart under enquiry are almost always the ones written by someone in sales who never spoke to the people doing the work.

What Costs You Can Claim

Qualifying expenditure is a defined list, not a general "costs of the project" figure:

• Staff costs for people directly working on the R&D, including gross salary, employer National Insurance and employer pension contributions, apportioned for the time genuinely spent on qualifying work
• Externally provided workers, meaning agency or staff provider personnel, restricted to 65 percent of the payment where the parties are unconnected
• Subcontracted R&D, also restricted to 65 percent where unconnected
• Consumable items used up in the R&D, including materials, water, fuel and power
• Software licences, and since April 2023 data licences and cloud computing costs
• Payments to clinical trial volunteers

Notably absent: rent, rates, most capital equipment, patent costs and marketing. Equipment bought for R&D usually goes through capital allowances instead, which is a separate and often larger claim.

The 65 percent restrictions catch people out when they budget. A £100,000 contract with an outside development house contributes £65,000 to the claim, not £100,000, so at 16.2 percent the credit is £10,530 rather than £16,200.

One genuine improvement under the merged scheme: the old rule that reduced or blocked SME relief on subsidised expenditure has gone. Grant funded projects no longer push a company out of the more generous route, which was a longstanding trap for anyone who had taken Innovate UK money.

The Rules That Quietly Kill Claims

Most failed claims in our experience do not fail on the science. They fail on administration, and three rules do most of the damage.

The claim notification deadline

For accounting periods beginning on or after 1 April 2023, a company must submit a claim notification form to HMRC if it is claiming for the first time, or if its last claim was made more than three years before the end of the notification period.

The window opens on the first day of the period of account and closes six months after the period of account ends. For a year ended 31 December 2026, the deadline is 30 June 2027.

Miss it and the claim is invalid. Not reduced, not queried. Invalid, however good the underlying R&D was, and with no discretion to accept a late notification.

We think this is the single most damaging rule in the current regime, and not for the reason HMRC intended. It is a deadline that runs largely before a company has done its year end accounts, which is precisely when most owner managers first ask whether their development work might qualify. By the time an accountant is looking at the numbers, the window has often closed. The companies it removes are disproportionately genuine first time claimants who were never on any adviser's list, which is close to the opposite of targeting non compliance.

The practical answer is unglamorous: if there is any chance your company will claim, notify. It costs nothing, it commits you to nothing, and the alternative is discovering in month eight that a real claim is legally dead. Put it in the calendar on the day the accounting period starts, not at the year end.

The additional information form

Since 8 August 2023, every claim must be supported by an additional information form submitted to HMRC before or at the same time as the Company Tax Return. It sets out the projects, the qualifying costs by category, the technical narrative and the name of the agent who advised on the claim.

If the form is missing, HMRC removes the claim from the return. Again, no discretion. The agent naming requirement is deliberate, and it has visibly changed behaviour at the aggressive end of the advisory market.

Overseas expenditure

For periods beginning on or after 1 April 2024, subcontractor and externally provided worker costs generally only qualify where the work is physically carried out in the UK, or the workers are subject to UK payroll taxes. There are narrow exceptions where the conditions needed for the R&D are not available in the UK and it would be wholly unreasonable to replicate them. Cost and workforce availability are explicitly not good enough reasons.

Plenty of UK software companies with offshore development teams saw their claims fall by more than half at this point, and some no longer bother.

Contracted out R&D, where the default flipped

Under the merged scheme, where one UK company pays another to carry out R&D, it is normally the customer who claims, not the contractor. That is the reverse of what many development agencies and engineering consultancies were used to. There are exceptions, including where the customer is a charity, a university or outside the UK tax net, and where the contractor was always doing work of its own accord rather than to the customer's specification.

If you build things to client specifications for a living, this rule deserves a proper look before you assume last year's claim can be repeated.

The PAYE and National Insurance cap

Payable credits are capped at £20,000 plus 300 percent of the company's total PAYE and National Insurance liabilities for the period. The cap exists to stop companies with almost no UK employment claiming large cash credits. There is an exemption for companies that are genuinely creating and managing intellectual property and are not spending heavily with connected subcontractors.

For a normal trading company with staff on the payroll the cap is rarely binding. For a two director company subcontracting most of the work, it often is.

HMRC's New Advance Assurance Pilot

This is the most useful development in the area for years and hardly anyone is using it.

Following the Autumn Budget 2025, HMRC launched a targeted advance assurance pilot on 18 May 2026, running for twelve months. It lets an SME ask HMRC for a view on up to two specific areas of a planned claim before it is submitted, choosing from:

• whether the project meets the definition of R&D for tax purposes
• whether overseas expenditure qualifies
• which party can claim for contracted out work
• whether the company is exempt from the PAYE and NIC cap

It is free, voluntary, and HMRC aims to respond within 40 calendar days. To apply, the company must be doing or planning the R&D in the period concerned, must not yet have claimed for that period, and must not have an open Corporation Tax enquiry.

Those four topics are not a random selection. They are the four issues that generate the most enquiries, which makes this pilot a fairly frank admission of where the regime is hardest to apply.

Our view is that any first time claimant with genuine doubt about whether a project qualifies should use it. The old advance assurance service attracted roughly eighty applications a year, which for a relief worth billions is close to nobody. Two practical notes: apply early in the accounting period, because 40 days plus your own preparation time sits awkwardly against a year end, and remember that assurance on the definition of R&D does not excuse you from the claim notification deadline. Do both.

How to Claim, Step by Step

1. Identify the projects and the technical uncertainties, with the people who did the work
2. Submit the claim notification if you are a first time or returning claimant, within six months of the period end
3. Consider advance assurance on any area you are genuinely unsure about
4. Calculate the qualifying costs by category, applying the 65 percent restrictions and time apportionment
5. Write the technical narrative, project by project, describing the advance sought and the uncertainty resolved
6. File the additional information form before or with the return
7. Claim on the CT600 with the R&D supplementary pages

The claim goes in the Company Tax Return, and you have two years from the end of the accounting period to make or amend it. Sound bookkeeping through the year makes this dramatically easier, because the hardest part of a late claim is reconstructing who spent what proportion of their time on which project eighteen months ago.

Our View

The economics of the specialist R&D market are worth understanding before you engage anyone. Most of the firms that dominate search results for this topic charge a percentage of whatever they recover, typically somewhere between 15 and 25 percent. That model rewards claim size, not claim durability, and the adviser's exposure ends when the fee is paid while yours runs for years. HMRC's own figures make the point: for 2023 to 2024 it estimated error and fraud at 14.6 percent in the SME scheme against 2.8 percent in RDEC, the scheme used by larger companies with in house tax functions. That is not an accident of complexity. It is a picture of which end of the market was being sold claims. If someone contacts you unprompted to say your business definitely qualifies, before they have spoken to anyone technical, treat that as information about their business model rather than yours.

The compliance crackdown has worked, and it has been blunt. Overall error and fraud fell from 17.6 percent in 2021 to 2022 down to an estimated 7.8 percent in 2023 to 2024. That is a real achievement. But it was delivered partly through volume enquiries that caught legitimate claimants alongside the rest, and through hard administrative deadlines that do not distinguish between a fraudulent claim and a good one filed a week late. Genuine innovators have been discouraged. We have met companies doing obvious qualifying work who now will not claim because they have heard the process is hostile. That is a real cost of the clean up and it does not show in the fraud statistics.

The relief is no longer big enough to change a bad decision, which is how it should be. At 15 to 16 pence per pound, R&D relief is a useful contribution to a project you were going to run anyway. It is not a reason to run one. We occasionally see business plans where the credit is doing structural work in the cash flow forecast, and that is a sign something has gone wrong upstream. Treat it as a rebate on committed spending, not as funding.

Keep the records as you go, not at the year end. The single highest value habit is a short contemporaneous note per project: what you were trying to achieve, what was uncertain, what you tried, what happened. Ten minutes a month. It converts a stressful reconstruction exercise into a filing job, and if an enquiry lands two years later it is the difference between a conversation and an argument. This is the same problem we see with every relief that depends on evidence rather than arithmetic. It is a bookkeeping discipline wearing a tax costume.

How IAK Can Help

We prepare R&D claims as part of the Corporation Tax work for companies we act for, on a fixed fee rather than a share of the recovery. That matters because it means when we tell you a project does not qualify, that advice is not costing us anything, and when we tell you it does, we are not being paid more for saying so.

In practice the work is: sitting down with whoever did the technical work to establish whether there is a real advance and a real uncertainty, getting the claim notification in on time, building the cost analysis from your payroll and purchase records rather than from estimates, and writing a narrative that reads like engineering rather than marketing. Where a claim is borderline, we would rather use the free advance assurance route than file and hope.

If you are already claiming through a contingent fee provider, it is worth a second opinion on whether the claim would survive an enquiry, because that risk is yours and not theirs. If you have never claimed and are not sure whether you should, contact us for a free consultation before your accounting period ends, which is when the decision is still cheap to make. You may also find our guides to Corporation Tax, capital allowances and what an accountant actually does useful background, and our Corporation Tax calculator will show you which rate band your profits fall into.

Sources

• Check if you can claim Research and Development (R&D) tax relief, GOV.UK, on the definition of R&D and who can claim.
• R&D tax relief: the merged scheme and enhanced R&D intensive support, GOV.UK, on the 20 percent expenditure credit, the 30 percent intensity threshold and the 86 percent enhancement.
• Check what Research and Development (R&D) costs you can claim, GOV.UK, on qualifying cost categories and the 65 percent restriction on unconnected subcontractors and externally provided workers.
• Tell HMRC that you're planning to claim R&D tax relief, GOV.UK, on the claim notification period and the consequences of missing it.
• Apply for targeted advance assurance on up to 2 areas of your R&D tax relief claim, GOV.UK, on the pilot launched 18 May 2026, the four eligible areas and the 40 day response target.
• HMRC's approach to Research and Development tax reliefs 2023 to 2024, GOV.UK, on the error and fraud estimates by scheme.
• Research and development tax reliefs: new contracting out rules and overseas restrictions, GOV.UK, on who claims for contracted out R&D and the overseas expenditure rules.
• CIRD84000, Corporate Intangibles Research and Development Manual, GOV.UK, on externally provided workers.