R&D Tax Relief Guide
Your Complete Guide to Understanding and Claiming R&D Tax Relief
What is R&D Tax Relief?
R&D tax relief is a UK government incentive designed to support companies investing in innovation.
Whether you're developing new products, improving manufacturing processes, building complex software systems, or tackling scientific challenges, this relief allows you to recover a portion of your qualifying costs, either as a repayment, tax saving, or both.
Since April 01 2024, the two historic R&D schemes (SME and RDEC) have been merged into a single unified regime, with adjusted rules, new reporting requirements, and stricter compliance standards. This guide breaks down everything you need to know, from eligibility and qualifying costs, to common pitfalls and how to protect your claim during HMRC scrutiny.
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What Qualifies as R&D?
HMRC defines R&D as activities that aim to achieve an advance in science or technology through the resolution of uncertainty. Common qualifying activities include:
- Developing or improving software platforms or systems
- Creating new materials or products
- Enhancing manufacturing processes for efficiency or sustainability
- Adapting existing technologies for new applications
- Overcoming technical challenges where no obvious solution exists
Important: Even projects that don't succeed can still qualify — it's the attempt to solve a problem that matters.
Quirky Rule
R&D Rule Quirk
Prototypes can qualify — but only if they're not sold. If you build something to test and it's scrapped, it counts. If it's sold to a customer, the costs can't be included.
What Costs Qualify for R&D Tax Relief?
To claim R&D tax relief, your company must have incurred qualifying expenditure that is directly attributable to a relevant R&D project.
Here are the main cost categories accepted by HMRC:
Staff costs
Includes gross salary, Class 1 NIC, and pension contributions for employees actively involved in the R&D. This can include developers, engineers, scientists, project leads and even certain support roles if they directly contribute to resolving the technical uncertainty. Note that director dividends and non-PAYE payments do not qualify.
Externally Provided Workers (EPWs)
Temporary workers engaged through staffing companies or personal service companies. Relief is usually available at 65% of the cost, provided the EPW works under the company's supervision, direction and control.
Subcontractor costs (⚠️ Limited from April 2024)
External companies performing R&D on your behalf. Critical update: From April 2024, only UK-based subcontractors are eligible for relief unless strict exemptions apply (e.g., the work must be done overseas due to geographical, environmental or legal constraints).
Software costs
Computer software directly used in R&D, such as development tools, cloud computing and specialist software packages. This can also include data and rights in data needed for the R&D work.
Consumable costs
Materials consumed or transformed in the R&D process. This might include raw materials for prototypes, chemicals for experiments, or other consumables directly used in the development work.
Who Can Claim R&D Tax Relief?
From April 2024, eligibility for RDEC is available to companies that:
- Are subject to Corporation Tax in the UK
- Have undertaken qualifying R&D activities
- Are not in liquidation or administration
- Have evidence to demonstrate the nature and extent of their R&D work
Important for new claimants: If you haven't claimed R&D tax relief before (or haven't claimed in 3+ years), you must notify HMRC within 6 months of the end of the accounting period in which the R&D took place.
Good News
No Size Restrictions
Unlike the old SME/Large distinction, there are no employee or turnover thresholds. Any company undertaking qualifying R&D can benefit from the new scheme.
Qualifying Costs
Under RDEC, the following costs are eligible for R&D tax relief:
| Cost Type |
Eligibility |
Key Restrictions (From April 2024) |
| Staff costs |
100% (gross pay + employer NIC + pension) |
Must be directly engaged in R&D work |
| Externally Provided Workers |
65% of cost |
Must be UK-based unless strict exemptions apply |
| Subcontractor costs |
65% of cost |
UK-based only (unless strict exemptions apply) |
| Software costs |
100% |
Must be directly used in R&D |
| Consumable materials |
100% |
Must be consumed or transformed in R&D |
Critical
Overseas Restriction Alert
Be aware that subcontractor and EPW costs incurred outside the UK are now generally excluded, unless they meet strict exemption criteria (e.g., work that must be done overseas due to geographical, environmental, or legal requirements).
Understanding RDEC (From April 1, 2024)
As of 1 April 2024, most UK companies now claim R&D tax relief through RDEC, replacing the previous SME and RDEC routes.
Relief is typically worth around 15% of qualifying R&D expenditure for profit-making companies (after tax), or up to 16.2% as a cash credit for loss-makers.
| Accounting Period Start Date |
Applicable Scheme |
Key Benefits |
| Before 1 April 2024 |
SME Scheme or RDEC |
Enhanced relief for SMEs (~25%–33%), RDEC for larger companies (~10%) |
| On or after 1 April 2024 |
RDEC |
20% above-the-line credit (taxable). Net benefit ~15% for profit-makers, up to 16.2% cash credit for loss-makers |
| 30%+ R&D spend companies |
Enhanced R&D Intensive Support (ERIS) |
Higher cash credit for loss-makers, worth up to ~26.6% of qualifying expenditure |
What Changed in 2024? (RDEC)
For accounting periods beginning on or after 1 April 2024, the UK government replaced the SME and RDEC schemes with a single, merged R&D tax regime (also known as the Research & Development Expenditure Credit, or 'RDEC'). This was part of a wider effort to simplify the system and reduce abuse.
Here's what's changed:
| Area |
Before April 2024 |
After April 2024 (RDEC) |
| Scheme split |
SME vs Large (RDEC) |
Single unified scheme |
| Credit rate |
SME: up to 21.5% (net)
RDEC: ~10.5% (net) |
~15% net benefit for most |
| Subcontracted R&D |
Broadly allowed (SMEs) |
Only UK-based subcontractors eligible (with exceptions) |
| EPWs |
Relief at 65% |
Still allowed, but must be UK-based unless exempt |
| Overseas costs |
Often claimable |
Now generally excluded, unless the work must be done overseas due to geography, environment or legal requirement |
| R&D Intensive Support (ERIS) |
N/A |
20% payable credit for loss-making R&D-intensive SMEs |
Important Change
Overseas Restrictions
This is one of the most impactful changes. Subcontractor or EPW costs incurred outside the UK are now excluded unless they meet a strict exemption test. This includes conditions where it is wholly unreasonable to carry out the activity in the UK.
New Requirement
Notification Requirement
Companies new to claiming (or not having claimed in 3+ years) must notify HMRC within 6 months of the end of the accounting period in which R&D took place, or risk losing the ability to claim.
Grants and Subsidies
Most companies receiving state aid or notifiable state aid (such as Innovate UK grants) can still benefit from R&D tax relief, but may need to use the RDEC scheme approach or make an adjustment to ensure they don't receive double funding for the same costs.
Enhanced R&D Intensive Support (ERIS)
R&D-intensive SMEs (those with at least 30% of their total expenditure on R&D) may be eligible for Enhanced R&D Intensive Support, offering higher relief rates for loss-making companies.
Compliance and HMRC Expectations
HMRC's approach to R&D tax relief has become increasingly rigorous. Here's what you need to know about staying compliant:
Quality Focus
Enhanced Quality Standards
HMRC has introduced more rigorous quality standards to ensure claims are well-documented and compliant. With proper preparation and expert guidance, you can confidently meet these requirements and protect your claim.
Key Documentation Requirements
- Technical reports: Clear, detailed documentation of the R&D project objectives, challenges faced, and methodology used
- Project records: Evidence of the development process, including design documents, test results, and iteration records
- Financial records: Robust cost tracking and allocation methodologies
- Staff records: Evidence of roles and time allocation to R&D activities
- Decision logs: Documentation of technical decisions and problem-solving approaches
Competent Professional Requirement: From April 2024, claims require oversight by a 'competent professional' - someone with relevant technical knowledge who can attest to the R&D nature of the work.
Common HMRC Challenge Areas
Watch Out
Areas Under HMRC Focus
Technical uncertainty: Is there genuine scientific/technological uncertainty?
Advance in knowledge: What constitutes an advance for your industry/field?
Time allocation: How much time was actually spent on R&D vs routine development?
Cost attribution: Can you justify that costs directly relate to R&D?
Why Work with Lexmore?
R&D tax relief can be transformational for your business, but the landscape has become more complex and risky. Here's why companies choose Lexmore:
Proven Track Record
Successfully secured millions in R&D tax relief for clients across technology, manufacturing, and engineering sectors.
Technical Expertise
Our team includes qualified engineers and scientists who understand your technical challenges and can robustly defend your claim.
HMRC Enquiry Support
Full support during HMRC enquiries, with comprehensive documentation preparation and expert representation throughout the process.
We don't just prepare your claim — we build a relationship. Our ongoing support ensures you maximise relief year after year while staying compliant with evolving regulations.
Frequently Asked Questions
How much is my claim likely to be worth?
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It depends on your eligible costs, but under RDEC, expect around 15% net benefit for profit-making companies, or up to 16.2% cash credit for loss-makers. R&D-intensive companies may qualify for enhanced rates.
Do we qualify if we're not a tech company?
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Absolutely. R&D happens across all sectors — manufacturing, food production, construction, automotive, aerospace, pharmaceuticals, and more. If you're solving technical problems or improving processes, you may qualify.
What if we used contractors or freelancers?
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You can claim for certain types of subcontractors and Externally Provided Workers (EPWs). However, from April 2024, only UK-based third parties are eligible unless strict exemptions apply.
How far back can we claim?
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You can generally make claims for the last two completed accounting periods, so timing is key. If you're a new claimant, you may also need to submit a notification to HMRC in advance.
Do we need to track staff time?
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HMRC does not require timesheets, but you must be able to reasonably justify how much time was spent on R&D, especially for staff who split their time between R&D and other duties.
Not necessarily, but the volume of HMRC enquiries has increased significantly. Preparing robust supporting documentation is your best defence. We can help with that.
Ready to Claim R&D Tax Relief?
Whether you're in software, engineering, life sciences or manufacturing, if you're solving difficult technical problems, there's a good chance you're doing R&D.
At Lexmore, we make the process easier, safer, and more valuable.
