UK R&D Tax Relief Guide by HMRC

This guidance outlines how tax relief for Research and Development (R&D) works for small and medium-sized enterprises (SMEs).
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company tax develop tax relief tax relief make R D small company
This guidance outlines how tax relief for Research and Development (R&D) works for small and medium-sized enterprises (SMEs).
About Techcelerate Ventures

Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.
company tax develop tax relief tax relief make R D small company
Research and development tax relief 
Making R&D easier for small companies
2    Research and development tax relief: Making R&D easier for small companies
Contents
Making R&D easier for small companies 
3 
Background 
4
What is R&D tax relief? 
5 
Is my company small or large? 
7 
Does my company have linked or partner companies? 
8
Which projects qualify? 
10 
How to show that your project is R&D within the tax definition 
12 
The start and end of a project for R&D tax purposes 
14
What costs qualify? 
16 
What costs do not qualify 
19
Subcontracted R&D 
20 
Subcontracting — who can make a claim? 
22 
Grants and subsidies 
23 
More on grants and subsidies 
24 
Why is RDEC important to SMEs? 
25
How to claim R&D relief 
26 
How to calculate your claim 
28 
Keeping records 
31
Advance Assurance 
32
Case Studies 
34 
The Agri-food Sector 
35 
ICT 
36 
Advanced materials 
37 
Advanced engineering 
38 
Life and health sciences 
39 
Construction 
40
Further help 
41
Frequently asked questions 
42
Glossary 
43
3    Research and development tax relief: Making R&D easier for small companies
Making R&D easier  
for small companies
This guidance outlines how tax relief  
for Research and Development (R&D) 
works for small and medium-sized 
enterprises (SMEs).
It provides:
• straightforward definitions and explanations of  
the schemes
• details of qualifying costs
• guidance on how to make a claim under the SME  
and RDEC schemes
• advice on where to find help and further detailed 
information.
This publication provides general guidance on the law, but how the law applies in a particular case is fact-dependent 
and where there is doubt you should contact HMRC.
4    Research and development tax relief: Making R&D easier for small companies
Background
In 2000 the government introduced 
a scheme to encourage scientific and 
technological innovation within the 
United Kingdom.
R&D is a Corporation Tax (CT) tax relief that may reduce 
your company’s tax bill if your company is liable for  
CT or, in some circumstances, you may receive a  
payable tax credit. This guidance is designed to help  
you make a claim for tax relief if you are an SME. 
The Research and Development Expenditure Credit 
(RDEC) scheme was introduced in the Finance Act 2013 
— it enables companies with no CT liability to benefit 
through a cash payment or a reduction of tax or other 
duties due. 
Specific definitions of R&D can be found at:  
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird81900 
Further guidance on RDEC can be found at: 
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird89705
5    Research and development tax relief: Making R&D easier for small companies
What is R&D relief?
6    Research and development tax relief: Making R&D easier for small companies
What is R&D relief?
For tax purposes, R&D takes place when 
a project seeks to achieve an advance in 
overall knowledge or capability in a field 
of science or technology.
R&D relief allows companies that carry out qualifying 
R&D related to their trade to claim an extra CT  
deduction for certain qualifying expenditure.  
The level of relief available depends upon  
which scheme the company uses.
The SME scheme 
From 1 April 2015, the relief a company can get has 
increased to 230% on their qualifying R&D costs.  
Loss-making companies can in certain circumstances 
surrender their losses in return for a payable tax credit. 
Research and Development Expenditure Credit  
(RDEC) scheme
From 1 April 2015 a taxable credit is available at  
11% of qualifying R&D expenditure. For loss making 
companies the tax credit is fully payable (subject to 
certain restrictions).
Features of the RDEC scheme
Companies with no CT liability will benefit from RDEC 
either through a cash payment or a reduction of tax or 
other duties due. The payable credit is limited to the 
company’s PAYE/NIC liabilities of the staff engaged  
in qualifying activities in the accounting period.
SMEs will be able to claim RDEC if they do subcontracted 
or subsidised research. Companies in groups can 
surrender the RDEC against another group company’s  
CT liability.
Further information on SMEs can be found on page 23.
7    Research and development tax relief: Making R&D easier for small companies
Is my company small or large?
To find out if a company is an SME for R&D tax relief 
purposes we look at:
• staff headcount (less than 500) 
• either turnover (€100m) or balance sheet total  
(less than €86m).
When accounts are prepared in sterling, convert the 
turnover and balance sheet totals to euros, using the 
exchange rate for the balance sheet date.
Sometimes, a company will have to take into account 
its own data, a proportion of a partner enterprise’s data 
or the data of a linked enterprise. There’s more about 
partner and linked enterprises on the next page. If your 
company has no external investors and isn’t in a group, 
you only need to count your own company data.
8    Research and development tax relief: Making R&D easier for small companies
Does my company have linked  
or partner companies?
If your company has external investors  
or is in a group, it’s worth looking at  
the detailed guidance. The following is  
a summary of the main rules. 
Linked companies
If the company is controlled by or controls other 
companies it is a linked company, for example if it  
has more than 50% of the shareholders’ or members’ 
voting rights in another company.
The data of the linked companies should be added  
to the data from the company that does the R&D.
Partner companies
If 25% or more of a company is owned by another,  
or if the company owns 25% or more of another, it is  
a partner company.
Certain companies and types of investor are excluded 
from consideration as a partner. There is more about  
this in the detailed guidance.
Detailed guidance on linked and partner companies  
can be found at: gov.uk/hmrc-internal-manuals/
corporate-intangibles-research-and-development-
manual/cird91000
A proportion of the data of the partner companies 
should be added to the data from the company that 
does the R&D. So if the other company controls 30%  
of the R&D company, add 30% of its data.
9    Research and development tax relief: Making R&D easier for small companies
B  
owns 60% of  
A
A   
does the  
R&D
D  
owns 25% of  
B
C  
owns 35% of  
B
A will add 25% of the accounts figures of D. 
So if D has a turnover of €30m,  
A will add €7.5m to its totals.
A will add 100% of the accounts figures of B. 
So if B has assests of €10m,  
A will add €10m to its totals.
A will add 35% of the of the accounts figures 
of C. So if C has turnover of €100m, A will 
add €35m to its totals
Example of a company being a linked or  
partner company 
Company A is linked to Company B because B has a 
60% holding in A.
B also has two partner companies: C and D,  
which own 32% and 25% of B.
A must add 100% of the data of B plus 35% of the 
data of C and 25% of the data of D to its own data.
10    Research and development tax relief: Making R&D easier for small companies
Which projects qualify?
11    Research and development tax relief: Making R&D easier for small companies
Which projects qualify?
Work that advances overall knowledge  
or capability in a field of science or  
technology, and projects and activities 
that help resolve scientific or technological 
uncertainties, may qualify for R&D relief.
R&D has a specific statutory definition for the  
purposes of R&D tax relief which is not the same as  
the commercial, engineering or accounting definitions. 
To qualify the company must be carrying out research 
and development work in the field of science or 
technology. The relief is not just for ‘white coat’ scientific 
research but also for ‘brown coat’ development work in 
design and engineering that involves overcoming difficult 
technological problems. 
This can include creating new processes, products or 
services, making appreciable improvements to existing 
ones and even using science and technology to duplicate 
existing processes, products and services in a new way. 
But pure product development in itself does not qualify.
Some examples of qualifying activities include software 
development, engineering design, new construction 
techniques, bio-energy, cleantech, agri-food and life  
and health sciences. There are case studies at the end  
of this guide for these industries.
Things to consider
• Does my company have a project?
• Am I seeking an advance in a field of science  
or technology?
• Does the advance extend the overall knowledge  
or capability in the field of science or technology  
and not just the company’s own state of knowledge  
or capability?
• Does the project involve an uncertainty that competent 
professionals can’t readily resolve and where solutions 
aren’t common knowledge?
Judging which projects and activities will qualify for  
R&D tax relief is usually the area where most people 
seek help. Experience has shown that companies 
can benefit from HMRC’s early involvement. There is 
information about our Advance Assurance scheme,  
which helps with these issues, later in this guide.
12    Research and development tax relief: Making R&D easier for small companies
How to show that your project  
is R&D within the tax definition
When you submit a claim it helps if you 
give details of your project. The questions 
below will help you decide if your project 
is within our definition for R&D. If your 
claim clearly sets out how you approach 
these questions, it helps HMRC see that 
your company really is doing R&D.
1. What is the scientific or technological advance?
Concentrate on the science and technology
Rather than stating the product, process or functionality 
being developed, consider what scientific or technological 
advance is being sought. This focuses attention on the 
project’s aim for an advance. This is important in judging 
whether or not R&D for tax relief purposes is being 
undertaken. 
Some activities aren’t science
Science doesn’t include work in the arts, humanities  
and social sciences (including economics).
‘Commercially innovative’ isn’t enough
It’s not enough that a product is commercially  
innovative. You can’t claim in respect of projects to 
develop innovative business products or services that 
don’t incorporate any advance in science or technology.
2. What scientific or technological uncertainties  
were encountered?
Did you really encounter ‘uncertainty’?
Scientific or technological uncertainty exists when 
knowledge of whether something is scientifically 
possible or technologically feasible, or how to achieve 
it in practice, isn’t readily available or deducible by a 
competent professional working in the field.
Not every problem is an uncertainty
But uncertainties that can be resolved through  
relatively brief discussions with peers are routine 
uncertainties rather than technological uncertainties. 
Technical problems that have been overcome in  
previous projects on similar systems aren’t likely to  
be technological uncertainties.
Set out what happened
In your claim, you should set out at a high level, in a  
way that can be understood by someone who’s not 
an expert, what the uncertainties were and when they 
started and ended.
13    Research and development tax relief: Making R&D easier for small companies
3. How and when were the uncertainties overcome?
Describe the methods used to overcome the 
uncertainties and the investigations and analysis 
undertaken. This shouldn’t be in great detail,  
but enough to show it wasn’t straightforward. 
Describe the successes and failures and the impact of 
these on the overall project. If the uncertainties weren’t 
overcome, explain what happened.
Remember that the commercial failure of the product  
or project does not mean that R&D was not present.  
And if the scientific uncertainties weren’t overcome,  
that can still mean that the work to address the 
uncertainties can be R&D.
 
 
 
 
4. Why wasn’t the knowledge being sought readily 
deducible by competent professionals?
Explain the uncertainty in the context of the known 
state of the field of research
It might be publicly known that others have tried to 
resolve the uncertainties and failed. Or maybe others 
have resolved the uncertainties, but precisely how it  
was done isn’t in the public domain. In either case a valid 
technological uncertainty can still exist.
What if there’s limited available information about the 
state of the field of research?
If there’s little public information available about the 
project, you’ll need to show that the people leading  
it are competent professionals working in the relevant 
field. This might be done by outlining their relevant 
background, professional qualifications and recent 
experience and then have them explain why they 
consider the uncertainties are scientific or technological 
uncertainties rather than routine uncertainties.
Whichever is appropriate, set out the details and have 
evidence available if needed.
14    Research and development tax relief: Making R&D easier for small companies
The start and end of a project  
for R&D tax purposes
It’s important to know when an R&D 
project starts and ends, because that 
makes sure your company claims the 
right amount of relief.
When a project starts
The project starts when work to resolve the uncertainty 
starts. This is when you have identified the technical 
issues that need to be resolved, and the current state  
of knowledge within that field of science or technology 
has not provided a solution to those uncertainties.
When a project ends
A project ends when that uncertainty is resolved or 
the work to resolve it ceases. This is when you have a 
working prototype or material device/product or process 
ready to be tested or go into production, or if you decide 
not to take the project forward.
R&D can take place even after production starts
If any new problems arise involving scientific or 
technological uncertainty after the product has been  
put into production or into use then the R&D process 
may start again. There is a distinction between 
such problems involving science and technological 
uncertainties and routine fault fixing or design tweaks.
It is particularly important that the people doing the 
work are involved when considering whether the project 
is R&D for tax purposes as they are the ones who 
understand best the scientific or technological problems 
involved. They should focus on what advances the 
project is seeking to achieve and the uncertainties to  
be faced rather than on the eventual product aspiration, 
specification or design.
15    Research and development tax relief: Making R&D easier for small companies
Possible commercial project timeline —  
defining R&D for tax purposes
This illustrates the qualifying and non-qualifying  
activities within a ‘whole life’ project plan. 
The parts of a project that require R&D activity to 
resolve scientific or technological uncertainties qualify 
for tax relief. The qualifying work starts when work to 
resolve the uncertainty starts, and ends when the new 
knowledge is codified in a usable form, or when work 
to resolve the uncertainty ceases. 
Beginning
End
RESOLUTION of scientific  
or technological uncertainty
RESOLUTION of scientific  
or technological uncertainty
Commercial/ 
scientific
Idea
Technological  
or Scientific 
Uncertainty 
ascertained
Technological  
or Scientific 
Uncertainty 
ascertained
Market/ 
feasibility 
Research
Technological  
or Scientific 
Uncertainty
resolved or 
work to resolve 
it stops
Technological  
or Scientific 
Uncertainty 
resolved or 
work to resolve 
it stops
Patents  
or other  
IP protection 
sought
Pre-production 
design
Industrial  
upscaling
Patents  
or other  
IP protection 
sought
Commercial 
application
Prototypes  
Prototypes  
Non-Qualifying
Non-Qualifying
Non-Qualifying
Qualifies
Qualifies
Examples of how this may apply to some of the  
industry sectors can be found on page 35 onwards.
16    Research and development tax relief: Making R&D easier for small companies
What costs qualify?
17    Research and development tax relief: Making R&D easier for small companies
What costs qualify?
Direct and externally provided staff, 
subcontracted R&D, consumables, 
software, trials, prototyping and 
independent research costs may all 
qualify for R&D relief. Capital expenditure 
does not qualify under this scheme,  
nor does expenditure on the production 
and distribution of goods and services.
Direct R&D staff costs
Your company can claim for salaries, wages, class 1 NIC 
and pension fund contributions for staff directly and 
actively engaged in the R&D project. 
This covers employees who undertake ‘hands on’ R&D 
work and the proportion of supervisory and managerial 
time spent specifically directing such employees in those 
activities.
Support staff costs, for example administrative or 
clerical staff, do not qualify, except when they relate to 
qualifying indirect activities. These can be activities like 
maintenance, clerical, administrative and security work. 
A more detailed definition of support staff costs at:  
hmrc.gov.uk/manuals/cirdmanual/CIRD81900.htm
 
Your company cannot claim for employment-related 
benefits.
Externally provided R&D staff
These are the staff costs paid to an external agency for 
staff who are directly and actively engaged in the R&D 
project — these are not employees and subcontractors. 
Relief is usually given on 65% of the payments made to 
the staff provider. Special rules apply if the company and 
staff provider are connected or elect to be connected. 
Further information on externally provided R&D staff 
can be found at: hmrc.gov.uk/manuals/cirdmanual/
cird84000.htm
18    Research and development tax relief: Making R&D easier for small companies
Subcontracted R&D
SME Scheme
Your company can generally claim for 65% of  
the payments made to unconnected parties.  
The subcontracted work may be further subcontracted  
to any third party. Special rules apply where the parties 
are connected or elect to be connected.
RDEC Scheme
R&D expenditure subcontracted to other persons is 
generally not allowable unless it is directly undertaken 
by a charity, higher education institute, scientific research 
organisation or health service body — or by an individual 
or a partnership of individuals.  
Further information on SME/RDEC schemes can be found 
at: hmrc.gov.uk/manuals/cirdmanual/cird84250.htm
 
Consumable items
Your company can claim for the cost of items that are 
directly employed and consumed in qualifying R&D 
projects. These include materials and the proportion  
of water, fuel and power consumed in the R&D process.
From 1 April 2015, the costs of materials incorporated  
in products that are sold are not eligible for relief.
Further information on consumable items can be found at: 
hmrc.gov.uk/manuals/cird82300.htm
Software directly used in the R&D
Your company may claim for the cost of software that 
is directly employed in the R&D activity. Where software 
is only partly employed in direct R&D, an appropriate 
apportionment should be made. 
Further information on software directly used in the  
R&D can be found at:  
hmrc.gov.uk/manuals/cirdmanual/cird82500.htm
 
Clinical trial volunteers
Pharmaceutical companies and research organisations 
often make payments to volunteers taking part in clinical 
trials. These are allowable for relief, but read  
the guidance first. 
Further information on payments to volunteers taking  
part in clinical trials can be found at:  
hmrc.gov.uk/manuals/cirdmanual/cird84400.htm
 
Contributions to independent research
Only large companies may claim R&D relief on 
contributions they make towards funding relevant 
independent R&D. This R&D must be carried out by 
the recipient and be related to the company’s trade. 
Contributions must be made to a qualifying body —  
a charity, higher education institute, scientific research 
organisation or health service body — or to an individual 
or a partnership of individuals. 
Further information on contributions to independent 
research can be found at: 
hmrc.gov.uk/manuals/cirdmanual/cird82200.htm
hmrc.gov.uk/manuals/cirdmanual/cird82250.htm
Prototypes
Where a prototype is created to test the R&D being 
undertaken, the design, construction and testing costs 
will normally be qualifying expenses.
However, if the prototype is also built with a view to 
selling the prototype itself (such as the construction 
of a bespoke machine), HMRC considers that to be 
production and outside the R&D scheme, even if R&D 
was undertaken to create the prototype. 
In that case you need to work out the split between  
R&D expenditure and production costs. For example,  
the construction costs and materials consumed would 
not be qualifying expenses, but design, modelling and 
testing costs could still qualify.
Collaborative working
In general, where two companies collaborate on a R&D 
project, each can claim relief on the qualifying costs they 
have incurred.
Where a company and a university or other research 
institute collaborate, only the company can claim relief 
on the qualifying costs it has incurred.
Collaborative arrangements are governed by their 
contracts and you should seek advice from HMRC  
where it’s unclear which company gets the relief.
19    Research and development tax relief: Making R&D easier for small companies
What costs do not qualify
Not all costs qualify, and you cannot receive R&D  
relief for:
• The production and distribution of goods and services
• Capital expenditure under either of the R&D relief 
schemes. However, a generous 100% Research and 
Development Allowance may be due on capital assets, 
such as plant, machinery and buildings used for R&D 
activity. 
Further information on capital assets used for R&D 
activity can be found at: gov.uk/hmrc-internal-
manuals/capital-allowances-manual/ca60000
• The cost of land 
• Payments for the use and creation of patents and 
trademarks, as these are the cost of protecting the 
completed R&D. This also includes the staff costs 
in relation to the time spent by all staff on the 
preparation and submission of such applications. 
However, the Patent Box enables companies to apply 
a 10 per cent rate of Corporation tax to profits earned 
from their patented inventions after 1 April 2013. 
 
Further information on Patent Box be found at:  
gov.uk/guidance/corporation-tax-the-patent-box
20    Research and development tax relief: Making R&D easier for small companies
Subcontracted R&D
21    Research and development tax relief: Making R&D easier for small companies
Subcontracted R&D
SMEs that subcontract qualifying R&D 
activities can claim tax relief on 65%  
of the payment to the subcontractor. 
SMEs undertaking qualifying R&D for 
large companies may claim under the 
RDEC Scheme.
Your company as the contractor
Under the SME Scheme the subcontractor does not  
need to be a UK resident and there is no requirement  
for the subcontracted R&D to be performed in the UK. 
There are special rules where the parties are connected 
or elect to be connected. The diagrams below help 
explain what you may claim. 
Further information and guidance on connected  
and unconnected companies can be found at: 
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird91000
Your company as the 
subcontractor
Generally, if an SME or large company carries out an  
R&D project under contract to a large company or 
person not chargeable to tax in the UK as a trade, 
profession or vocation, they are likely to be able to  
make a claim under the RDEC scheme.
Further information and guidance on your company  
as the subcontractor can be found at: 
hmrc.gov.uk/manuals/cirdmanual/cird81470.htm
Unconnected Subcontractors
SME 
Scheme
Company can  
claim 65% of 
the qualifying 
R&D payment 
made to a  
subcontractor
RDEC 
scheme
Generally the 
expenditure 
contracted to  
other persons is  
not allowable
However
100% of the R&D 
expenditure can 
qualify if the 
subcontractor falls 
within Note 1
Connected Subcontractors
SME 
Scheme
The lesser of 
100% of the R&D 
payment made to 
the subcontractor 
or the relevant 
expendature in 
the connected 
party’s accounts
See 
Note 2
RDEC 
scheme
Generally the 
expenditure 
contracted to  
other persons is  
not allowable
However
100% of the R&D 
expenditure can 
qualify if the 
subcontractor falls 
within Note 1
Note 1: 
An individual, a partnership 
made up wholly of individuals, 
or a qualifying body. Further 
information can be found at: 
hmrc.gov.uk/manuals/
cirdmanual/cird82250.htm
Note 2: 
Definitive rules can be found at:  
hmrc.gov.uk/manuals/
cirdmanual/cird84200.htm
22    Research and development tax relief: Making R&D easier for small companies
Subcontracting —  
who can make a claim?
Contracting company
Relief
Subcontractor
Relief
SME
Yes
SME
No
SME
Yes
Large company
No
SME
Yes
Qualifying body, individual or 
partnership
No
Large company
No
SME (even if the SME further 
subcontracts to qualifying body 
individual or partnership)
Yes (under RDEC scheme)
Large company
No
Large company
Yes
Large company
Yes
Qualifying body, individual or 
partnership
No
Large company
No
Another group company
Yes
23    Research and development tax relief: Making R&D easier for small companies
Grants and subsidies
Grants or subsidies that your company 
receives for your R&D project may make 
a difference to your R&D claim.
The SME scheme is a notifiable State Aid, and a company 
can’t get the SME relief if is receiving any other notifiable 
State Aids for the same R&D project.
So if you are thinking of claiming for a project that has 
already received a grant, it is essential that you establish 
whether that grant was a notifiable State Aid. The grant 
provider will be able to tell you that. 
If you have received a grant which is notifiable State Aid, 
for an R&D project, you can’t get relief under the SME 
scheme, but eligible expenditure will qualify under the 
RDEC scheme. 
You don’t need to reduce the RDEC eligible expenditure 
by the value of the grant received.
If the company has a number of projects it may  
make RDEC claims for projects that have had State Aid,  
and SME claims for non-grant funded project(s).
24    Research and development tax relief: Making R&D easier for small companies
More on grants and subsidies
You may have received a grant which 
is not a notifiable State Aid — examples 
include de minimis State Aid, Horizon 
2020 or Framework Programme funding. 
If you have received a grant which is not a notifiable 
State Aid, or have received any other type of subsidy for 
one of your R&D projects, you may be eligible to claim 
under both the RDEC and the SME scheme. 
You can claim under the RDEC scheme for eligible 
expenditure which has been subsidised by the grant or 
subsidy. In addition, if there is eligible expenditure on 
the project which has not been covered by the subsidy, 
you can make a claim for the balance of the expenditure 
under the SME scheme. 
Example
Expenditure on project:  
£125,000 — staff and consumables
Amount of grant received:  
£80,000 — potentially eligible for RDEC claim 
Balance of expenditure:  
£45,000 — potentially eligible for SME Claim 
25    Research and development tax relief: Making R&D easier for small companies
Why is RDEC important to SMEs? 
SMEs may also claim relief under the 
RDEC scheme if they cannot claim under 
the SME scheme because of a grant or 
subsidy, or because they are carrying out 
subcontract R&D for a large company. 
 
 
 
 
 
 
 
 
SME worked example
Profit and Loss 
Account (£) 
Sales
1,000
Cost of sales
(500)
Gross profit
500
R&D qualifying expenditure
(100)
Other expenses
(150)
Total operating costs
(250)
Net profit before tax
250
Tax due (see below)
24
Total tax
24
Profit after tax 
226 
Corporation Tax 
Computation (£)
Net profit before tax
250
Less R&D relief
(130%) (130)
Adjusted profit before tax
120
Corporation Tax due at 20% 
24 
Corporation Tax 
payable (£)
Corporation Tax
24
RDEC worked example 
Profit and Loss 
Account (£) 
Sales
1,000
Cost of sales
(500)
Gross profit
500
R&D qualifying expenditure
(100)
11% RDEC on expenditure
11
Other expenses
(150)
Total operating costs
(239)
Net profit before tax
261
Tax due at 20%
52.2
Total tax
52.2
Profit after tax 
208.8 
Corporation Tax 
Computation (£)
Net profit before tax
261
Corporation Tax due at 20% 
52.2 
Tax payable (£)
Corporation Tax due
52.2
Less tax credit
(11)
Corporation Tax payable
41.20
26    Research and development tax relief: Making R&D easier for small companies
How to claim R&D relief
27    Research and development tax relief: Making R&D easier for small companies
How to claim R&D tax relief
Making a claim
CT600
You can claim R&D relief by entering the total qualifying 
expenditure on the full Company Tax Return form, 
CT600.
Payable Tax Credit
Under the SME scheme, SMEs that prepare their accounts 
on a going concern basis may be able to claim a payable 
tax credit - up to 14.5% of the R&D loss surrendered from 
1 April 2014.
Backdated claims 
If your company has been undertaking qualifying R&D 
and has not yet claimed R&D relief, you may make a 
backdated claim within the anniversary of your filing  
date — generally two years after the end of the 
accounting period.
28    Research and development tax relief: Making R&D easier for small companies
How to calculate your claim
There are three stages to making your 
claim. Using an example, we explain  
how to take your figures and turn them 
into a claim.
1. Work out your allowable 
expenditure
Your total costs
What is allowable 
Total
R&D staff (x3) with total 
costs £150,000 and 80% 
time directly on R&D.
£150,000 x 80% allowable 
as staff costs
£120,000
R&D manager’s costs 
£100,000 with 20% of 
time directly managing 
the R&D activity.
£100,000 x 20% allowable 
as staff costs
£20,000
Heat and light £5,000 
with 25% consumed in 
R&D project
£5,000 x 25% allowable 
as consumable items
£1,250
Disposable laboratory 
equipment consumed 
£200
£200 allowable as 
consumable items
£200
£80,000 payments 
to an unconnected 
subcontractor for R&D 
work
£80,000 x 65% of 
payments allowable as 
subcontracted R&D
£52,000
£70,000 payments to 
an unconnected staff 
provider for staff directly 
engaged on R&D.
£70,000 x 65% allowable 
as an externally provided 
worker (EPW).
£45,500
£238,950
In this example, we’ve worked out that the total 
qualifying expenditure is £238,950. 
The next thing to do is to turn this into a figure for  
the amount of R&D tax relief that the company wants  
to claim.
29    Research and development tax relief: Making R&D easier for small companies
2. Turn the allowable 
expenditure into an  
R&D tax relief figure
Total allowable costs
£238,950
Multiply by 130%
£310,635
Add these together to get the total R&D tax relief: 
‘enhanced expenditure’
£549,585
3. Put the R&D tax relief into 
the right box on the company 
tax return
Now that we have worked out the R&D tax relief, this can 
be entered onto the company tax return
For accounting periods that start on or after 1 April 
2015, use version 3 of the company tax return. Version 2 
is for periods before this. The two versions have different 
box numbers, so we provide guidance on both. Check the 
front page of the tax return to see which version you are 
using.
Using version 3 of the company tax return
Put an X in the box at box 650.
Enter the enhanced expenditure figure in box 660  
— in this example you would enter £549,585.
30    Research and development tax relief: Making R&D easier for small companies
Using version 2 of the company tax return
Put an X in the box at box 99.
Enter the enhanced expenditure figure in box 101  
— in this example you would enter £549,585.
Claiming the payable tax credit?
If your company wants to claim a payable tax credit, 
there are a couple more steps to carry out before you  
fill in the tax return.
First you need to know how much tax you are due to 
pay in this period.
Second, you need to calculate the amount of the  
payable tax credit. In the simplest cases, this figure will 
be (‘enhanced expenditure’ x payable tax credit rate).  
Using 2016 rates and the example above, the payable 
tax credit will be:
£549,585 x 14.5% = £79,690.
Guidance on how to calculate the amount of the payable 
tax credit can be found at: gov.uk/hmrc-internal-manuals/
corporate-intangibles-research-and-development-
manual/cird90500
Now you are ready to enter the figures.
Using version 3 of the company tax return
Enter the company’s Self Assessment figure in box 525.
Enter the tax credit figure in box 530 — in this example 
you would enter £79,690.
Complete box 545 — in this example, you would enter 
£79,690.
Complete box 570 — that’s box 545 minus box 525.
Put an X in the box at box 650.
Enter the enhanced expenditure figure in box 660  
— in this example you would enter £549,585.
Enter the payable tax credit figure at box 875 — in this 
example, you would enter £79,690.
Using version 2 of the company tax return
You need to complete boxes 86, 87, 89, 99, 101 and 143.
Claiming the RDEC?
Using version 3 of the company tax return.
You need to calculate the expenditure credit due to the 
company. Using 2016 rate, and for this example, it would 
be £238,950 x 11% = £26,285.
Enter the expenditure credit figure at box 530 — in this 
case, it is £26,285.
Complete box 570.
Check box 650, and for box 660 enter £549,585.
Complete box 880 — in this case it will be £26,285.
 
31    Research and development tax relief: Making R&D easier for small companies
Keeping records
There is no additional record keeping 
requirement specifically for the purposes 
of claiming R&D relief.
You should be able to give a summary of the R&D 
project undertaken and explain how the project is R&D 
within the tax relief definition. It would be helpful if you 
provide this information in a short report at the time of 
making your claim. 
Focus on the advances being sought and the 
uncertainties faced rather than just a description of  
the finished product. Include a breakdown of the 
expenses that qualify for relief.
32    Research and development tax relief: Making R&D easier for small companies
Advance Assurance
33    Research and development tax relief: Making R&D easier for small companies
Advance Assurance
In November 2015, HMRC introduced 
Advance Assurance for companies that 
claim R&D tax relief in November 2015.
If your company carries out R&D for itself or other 
companies, it could qualify for Advance Assurance.  
This means that for the first three accounting periods  
of claiming for R&D tax relief, HMRC will allow the claim 
without further enquiries. 
Applying for Advance Assurance is voluntary and you 
can do this at any time before the first claim for R&D 
tax relief. Your company can still apply for R&D tax relief 
without Advance Assurance. 
Further information, help and advice can be found at: 
gov.uk/guidance/research-and-development-tax-relief-
advance-assurance
34    Research and development tax relief: Making R&D easier for small companies
Case Studies
35    Research and development tax relief: Making R&D easier for small companies
The Agri-food Sector
The Agri-food sector is increasingly 
exploiting new science and technology.
A project to develop a new feed or to grow crops that 
have substantially increased vitamin content, produce 
better or more reliable yields, or are more tolerant to 
weather conditions and resistant to blight, would be 
qualifying R&D. 
The scientific and technological advance is in resolving 
the uncertainty in the creation of a new improved strain. 
However, work to protect this new strain with plant 
breeding rights does not qualify as it is regulatory,  
not scientific or technological activity.
Not every change advances overall knowledge and 
capability. Creating new Vitamin C rich confectionery 
simply by adding Vitamin C to the ingredients does  
not qualify. A competent professional could carry out 
the process without uncertainty in either combining the 
ingredients or their reaction in the body when consumed.
Creating an innovative chilled food container  
that provides a substantially longer shelf life than  
currently available, would also qualify. The scientific  
or technological uncertainties to be addressed are in the 
interactions between the food, gas content and container 
to keep the food fresh for longer. By contrast, the work 
in dealing with authorities to comply with extended  
use-by date regulation would not qualify.
Not all innovation qualifies. A project to create a food 
container where the innovation lies in the artistic 
design or presentation of the packaging to encourage 
prospective customer purchases would not qualify.  
The uncertainty here is in design or marketing, not  
in science or technology.
36    Research and development tax relief: Making R&D easier for small companies
ICT
The computer games industry provides 
particularly good examples of innovative 
projects that do meet the requirements 
of the R&D schemes and also examples 
of projects which do not. 
No matter how original and inventive the game 
storylines are, these are not scientific or technological 
advances. The important criterion is not ‘what’ is 
produced but ‘how’.
A company realised that each object on a game’s screen 
had to be programmed in respect of its interaction 
with all the other objects. As the game became more 
complex, more objects were introduced and the amount 
of code required rose exponentially. The solution was 
to programme the properties of each object. When 
the objects interacted, a separate code was no longer 
required as the inherent properties produced the 
outcomes. The qualifying expenditure on developing this 
innovative code qualified for R&D relief.
The ICT sector is so fast-moving that further advances 
overtake new and ground breaking developments very 
quickly. What is important is that a project represents  
an advance at the time of development.  
New encryption and security techniques are being 
developed regularly and in many cases give rise to 
further advances. Even if the technique is quickly 
rendered redundant it will probably qualify for relief.  
The same applies to new search engines using new 
search methods.
Many advances are in the software field but advances 
in hardware are not unusual and will qualify for R&D 
relief if they are designed to overcome a scientific or 
technological uncertainty. Equally, very small companies 
dealing in subcontracted work may qualify if the work 
undertaken is sufficiently innovative, even if the larger 
contractor’s project does not qualify.
37    Research and development tax relief: Making R&D easier for small companies
Advanced materials
Whilst some companies specialise in the 
design and production of new materials, 
other companies find they become 
involved in this area as an adjunct  
to their main activities.
A company, specialising in agricultural engineering,  
used a probe to provide information on the quality of 
cereals which were transported in sacking. Measurements 
could only be taken at the top, as anywhere else would 
damage the sacking. This however did not produce 
representative samples. 
The company designed a material which allowed a  
probe to enter the sacking and which reverted to  
a sealed surface once the probe was removed.  
Although the market for this material was limited, 
it proved extremely successful in overseas markets. 
For R&D purposes the company incurred qualifying 
expenditure in overcoming the uncertainty in  
developing the material.
A further development arose when the company 
received orders from Eastern European countries,  
where the material did not react in the required way 
in sub-zero temperatures. The company undertook 
further research to amend the material to meet the 
requirements of the extreme conditions. The additional 
expenditure on manufacturing the material was not 
qualifying but the research costs of amending the 
material to meet ‘cold weather’ issues again qualified.
In many projects involving advanced materials, the 
scientific and/or technological uncertainty can be readily 
identified. However, the use of ‘new’ materials in existing 
processes may also qualify if it can be shown that the 
outcome has or was intended to significantly improve 
efficiency, for example, significantly reduce waste.
38    Research and development tax relief: Making R&D easier for small companies
Advanced engineering
R&D is increasingly providing an 
important competitive edge in this sector. 
A project is commissioned to produce a prototype  
(not to be sold) that will test a design for a new  
eco-petrol engine and exhaust. The goal is to achieve  
a substantial reduction in eco-unfriendly emissions with  
a performance at least as good as a comparable engine. 
This appears to competent professional engineers to 
offer hope of achieving a real advance by way of an 
improvement in vehicle technology. The uncertainty 
in science and technology is whether this substantial 
reduction with the comparable performance sought is 
possible. Even if unsuccessful, this and the construction  
of the prototype is still a qualifying R&D project.
On the other hand, an innovative in-bus eco-waste bin, 
where the innovation is in the attractive and appealing 
presentation of different compartments designed 
specifically to encourage the usage and promotion of 
recycling, does not qualify. The uncertainty of persuading 
people to put their litter in the bin is in the field of social 
science, not in the field of technology. The technology 
required would be obvious to a competent engineer.
A project for a new standard bus engine which is 
substantially lighter, cheaper, or faster to produce  
than any currently available or known to be possible  
(for example patented), whilst maintaining performance 
levels (for example in power, robustness and life) can all 
qualify as R&D. However, a minor and routine adjustment 
such as one to incorporate slightly better spark plugs, 
already designed and used in another vehicle, would  
not qualify.
39    Research and development tax relief: Making R&D easier for small companies
Life and health sciences
The creation of new drugs is an obvious 
example of qualifying R&D in this sector.
Creating a new drug, up to and including Phase III trials, 
to more effectively and safely reduce the risk of a stroke, 
is a qualifying project. The salaries of both the scientists 
and their laboratory assistants doing this hands-on R&D 
can qualify. However, their work to achieve important 
regulatory FDA approvals does not qualify, because any 
uncertainty in achieving these is in regulation,  
not science or technology.
A project to create a new artificial bladder system for 
patients with urinary difficulties, substantially more 
comfortable, safe and leak-proof than any other 
designed, qualifies as R&D. The advance sought and 
uncertainty addressed is how to bio-engineer the 
materials to achieve these qualities, enabling safe 
insertion and avoiding rejection.
However, where a competitor reverse-engineers this 
product, for markets not covered by any intellectual 
property protection, this does not qualify. The advance 
in science or technology worldwide has already been 
overcome and the competitor’s uncertainty is not an 
uncertainty at industry sector level, rather an uncertainty 
in their own state of knowledge.
A project for newly-diagnosed diabetes patients to 
provide details of their blood sugar to the hospital via 
a simple internet web form is innovative. It allows the 
hospital to monitor their condition in real time and 
advise the patient immediately on how best to manage 
their condition. 
Although this achieves an advance in patient care,  
any uncertainty associated with the patient’s use of  
the software is not an uncertainty in the technology 
itself. As such, this is not a qualifying R&D project.  
The design of the web-based system would be obvious 
to a competent professional.
40    Research and development tax relief: Making R&D easier for small companies
Construction
In general, this is a traditional and  
well-proven industry. However an 
increasing number of companies 
undertake R&D to exceed the traditional 
methods in terms of life expectancy of 
buildings, durability or robustness.
A company created a cladding system which had the 
appearance of ‘normal’ brickwork but incorporated the 
capacity for off-site fabrication, improved fire protection 
and suitability to fast-track production. Mechanical fixing 
rather than wet mortar provided strength and durability, 
which together with the capacity to construct in all 
weather conditions provided significant cost savings.  
The uncertainty of the materials in the cladding system 
and the technological uncertainties surrounding fixing 
were qualifying R&D projects.
Another company specialised in constructing laboratories. 
To combat contamination the company designed some 
new buildings with removable sections. Exterior walls 
could be slid away and a unit could be removed in total 
and replaced by a new unit before the exterior walls 
were slid back into place. 
The technological uncertainties surrounding the 
mechanisms to achieve this had to be overcome  
before the concept proved viable, making this a 
qualifying project.
A further example of innovation is a company which 
used wood in part of a project. Traditionally the wood 
needed to be of a certain age but the company was able 
to modify a coating so that younger and cheaper wood 
could be used whilst still having the required qualities. 
Significantly this development was a small element of  
an overall conventional project. Only after discussion  
with the site foreman did the company directors realise 
that the modification and application of the coating 
qualified for R&D relief.
41    Research and development tax relief: Making R&D easier for small companies
Further help
Further information on about Research and Development 
relief can be found at: gov.uk/guidance/corporation-tax-
research-and-development-rd-relief
Further information on Advance Assurance can be 
found at: gov.uk/government/publications/research-
and-development-tax-relief-application-for-advance-
assurance-for-research-and-development-tax-relief-ct-
rd-aa
Department for Business, Energy and Industrial Strategy 
(BEIS) guidelines can be found at: 
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual
42    Research and development tax relief: Making R&D easier for small companies
Frequently asked questions
Can I claim R&D relief and a grant?
Yes, however the EU notification status of the grant  
will affect under which R&D scheme you can claim.  
Most grants are ‘notifiable’ therefore both SMEs and 
large companies can claim under the Large Company 
Scheme or the RDEC scheme on the gross qualifying 
expenditure.
How do I know if a grant is notified?
Your grant provider will be able to tell you whether  
or not the grant/subsidy is notified.
Can I claim patent costs?
The costs of preparing and registering a patent are not 
R&D — they are the costs of protecting the completed 
R&D. However, the Patent Box enables companies to 
apply a 10% rate of Corporation Tax to profits from its 
patented inventions after 1 April 2013. 
Further information on claiming patent costs can be  
found at: gov.uk/corporation-tax-the-patent-box
What is the difference between a subcontractor  
and an externally provided worker?
A subcontractor is a person paid by the R&D company to 
carry out a specific R&D activity. An externally provided 
worker is an individual who provides or is under an 
obligation to provide their services personally to the 
R&D company under the terms of a contract between 
them and the staff provider. The individual will be paid 
by the staff provider but work under the R&D company’s 
direction. The company pays the staff provider.
How do I treat R&D losses?
Under the SME scheme, for expenditure incurred on 
or after 1 April 2014, the company may surrender the 
R&D loss for a payable tax credit of 14.5% (previously 
11% from 1 April 2012). Any unsurrendered or unutilised 
losses under either the SME or RDEC schemes may be 
carried forward to be set against future years trading 
profits under the normal corporation tax rules.
How long will it take to receive an R&D tax credit 
repayment?
HMRC aims to deal with 95% of payable tax credit claims 
within 28 days of receiving the claim.
 
43    Research and development tax relief: Making R&D easier for small companies
Glossary
Appreciable improvement — to change or adapt the 
scientific or technological characteristics of something 
to the point where it is ‘better’ than the original. The 
improvement should be more than minor or routine 
upgrading and should represent something that would 
generally be acknowledged by a competent professional 
in that field as a genuine and non-trivial improvement.
Appropriate proportion — the expenditure claimed 
by the company for R&D must be representative of 
the amount of time spent carrying out qualifying R&D 
activity. The company must be able to demonstrate that 
costs have been calculated to remove any elements that 
were not incurred during the R&D process.
Competent professional — an expert working within 
the field of science or technology in which the advance  
is being sought.
Consumable items — Where R&D activity results in 
items being wholly used up or transformed within the 
process these are consumable items and may be eligible 
for relief. However, from expenditure incurred on or after 
1 April 2015 where those items are incorporated into the 
final product and sold then the costs of those items will 
not be eligible for relief.
Corporation Tax — A limited company must pay 
Corporation Tax on profits from doing business, however 
the amount of Corporation Tax you pay may be reduced 
if you are undertaking relevant R&D activity. 
Externally provided workers (EPW) — Workers are 
provided through a staff provider. The staff provider is 
required to operate PAYE in relation to individual workers 
supplied to a client. 
The conditions to be satisfied can be found at:  
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird84100
Filing date — The date by which a company has to 
submit its tax return to HMRC. The date will be shown  
on the notice issued to the company. Any amendment to 
a tax return must be submitted no later than 12 months 
after the filing date.
Notifiable State Aid — State Aid is granted by public 
authorities through state resources to provide assistance 
to an organisation. Many companies receive State Aid as 
a contribution towards their research and development 
activity. If your company receives State Aid then HMRC 
needs to know as it can affect the amount you can claim 
in R&D tax relief. Your grant notification documents will 
say it the grant is notifiable State Aid or not.
Prototype — An original model constructed to include 
all the technical or scientific characteristics of the new 
product or process determined by the R&D undertaken 
within a project.
44    Research and development tax relief: Making R&D easier for small companies
R&D — Research and Development for tax purposes 
takes place when a project seeks to achieve an advance 
in science or technology. The work is undertaken on a 
systematic basis in order to resolve technical or scientific 
uncertainty and aims to advance the level of knowledge 
in a particular field of science beyond the level known 
before the research and development took place. 
R&D project — The R&D project is not the project 
to develop the product. See paragraph 19 of the 
Department for Business, Energy and Industrial  
Strategy (BEIS) guidelines (formerly Business Innovation 
and Skills {BIS}) which defines the “project” for R&D 
purposes. We very often see claims stating that the 
advance is the creation of a project which does x, y,  
or z (and where the claim is based on the costs of 
creating that product). 
That is not the correct test. The specific advances in 
science and technology with that (commercial) project 
must be identified. Each such specific advance will be 
a separate R&D project. Only the costs of resolving the 
scientific or technological uncertainties linked to each  
of those advances will qualify.
RDEC — Research and Development Expenditure Credit. 
A stand-alone credit to be brought into account as a 
receipt in calculating the profits of large companies for 
research and development expenditure incurred on or 
after 1 April 2013. Companies with no corporation tax 
liability will benefit from RDEC either through a cash 
payment or a reduction of tax or other duties due.
Readily deducible — Where the knowledge or capability 
is publicly available or known by competent professionals 
working in the field.
Science — Science is the systematic study of the nature 
and behaviour of the physical and material universe. 
Work in the arts, humanities and social sciences, including 
economics, is not science for the purpose of these 
guidelines. Mathematical techniques are frequently 
used in science but mathematical advances in and of 
themselves are not science unless they are advances in 
representing the nature and behaviour of the physical 
and material universe.
SME — A small or medium sized enterprise.
SME scheme — You can only claim under the scheme 
for SMEs if your company meets the definition of a SME 
for R&D tax relief purposes. You can only claim R&D tax 
relief as a SME if your company is a going concern and 
not in administration or liquidation when you make your 
claim. If you’ve made a claim and the company then 
ceases to be a going concern you can’t get a tax credit.
Technology — Technology is the practical application  
of scientific principles and knowledge, where ‘scientific’  
is based on the definition of science above.
Webinar — HMRC have a number of seminars and 
presentations which take place on the internet. You can 
register your interest to view these on the HMRC website.
Issued by
HM Revenue & Customs
November 2016 © Crown Copyright 2016