Calculating R&D tax credits

Important note on R&D tax relief

For accounting periods beginning on or after 1 April 2024, the previous SME and RDEC schemes no longer apply. Claims for these periods are made under the merged R&D tax relief scheme or (if you qualify) Enhanced R&D Intensive Support (ERIS).

In this guide we explain who can claim, what costs count, and give worked examples for both the merged scheme and ERIS.

Who can claim R&D tax relief?

If your company pays UK Corporation Tax and you’re doing genuine R&D in HMRC terms, you may be able to claim. Under the merged scheme, this is now the default route for most companies (large or SME).  

There are two relevant routes:  

• Merged scheme (R&D expenditure credit): available to companies that are trading, within the charge to Corporation Tax, and have qualifying R&D projects
• ERIS: only for loss-making R&D-intensive SMEs that meet the 30% R&D intensity condition (with some limited exceptions)

How far back can you claim?

HMRC’s Company Tax Return rules give you a retrospective window, and in most cases you have up to 24 months from the end of the period of account to make an R&D claim (with different deadlines if your period of account is longer than 18 months).

Claims are also subject to meeting the current process requirements, including submitting a claim notification where required and completing the Additional Information Form (AIF) before the claim can be processed.

Step 1: work out your qualifying R&D spend

Before you calculate any benefit, you need your qualifying expenditure (QE). HMRC’s cost categories include the following:

1. Direct staff costs‍

This includes the salary costs of employees working on qualifying R&D, based on the time they spend on the project. You can also include the associated employer’s National Insurance and pension contributions, plus certain reimbursed expenses that relate to the R&D work.
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2. Contractors or Externally Provided Workers (EPWs)

This covers individuals who work on your R&D but are employed and paid through another company (for example an agency, group company or other provider). Where the EPW is supplied by an unconnected third party, the amount you can include is generally restricted to 65% of the payment, provided the arrangement meets the qualifying rules.‍

3. Subcontracted R&D work‍

If you pay a third party to carry out R&D activities for you, those subcontractor costs may be claimable under the merged scheme, as long as the work and the contract meet the qualifying rules. Where the subcontractor is unconnected, the amount you can include is generally restricted to 65% of the payment. Subcontracted R&D carried out overseas is generally not eligible, unless a limited exception applies.‍

4. Consumables and raw materials

You can include materials and items that are consumed or transformed during the R&D work, including materials used in trials, testing and prototypes. Certain utilities used in the R&D process, such as water, fuel and power, can also qualify where they’re directly related to the R&D activity.

5. Software, cloud and data costs

This covers software licences and tools used directly in your R&D work, including development, testing, simulation and analysis software. You can also include qualifying cloud computing and data costs where they’re used for R&D activities (for example hosting R&D environments, running models, processing datasets, or storing and accessing R&D data). Hardware and general IT overheads are not included.

If you build software for your own business as part of an internal system or platform, some of that spend may fall under R&D capital allowances instead, depending on how it’s treated in your accounts.

Each cost that falls under these categories should be multiplied by the proportion of time/amount spent on qualifying R&D activities during the accounting period. If you need support, our experts can guide you.‍

A few key details that regularly trip up claims:

• You can only claim costs you’ve paid, unpaid invoices do not qualify
• For grants and subsidies, there’s no restriction on claiming for subsidised costs under the merged scheme or ERIS
• HMRC recommend keeping records of R&D-related costs from the moment they’re incurred, rather than collecting the information retrospectively

Step 2: calculate the merged scheme credit

Under the merged scheme, the R&D expenditure credit rate is 20% of qualifying R&D spend.  

It’s also taxable (it’s treated as trading income), which is why the “net” benefit depends on your Corporation Tax rate.  

Merged scheme worked examples

Example A: profit-making company (merged scheme)

Assume:

• Qualifying R&D spend (QE): £100,000
• Expenditure credit rate: 20%
• Corporation Tax rate (for illustration): 25%
  

1) Work out the gross credit

£100,000 × 20% = £20,000  

2) Account for tax on the credit (simplified view)

Because the credit is taxable income, there is “notional tax” on it at the applicable Corporation Tax rate.  

£20,000 × 25% = £5,000 tax

3) Net benefit (simplified view)

£20,000 − £5,000 = £15,000 net benefit (around 15p per £1 of QE)

In practice, the credit is used through HMRC’s set steps (it first reduces Corporation Tax and then may be payable depending on your wider position).  

Example B: loss-making company (merged scheme)

Assume:

• QE: £100,000
• Gross credit: £20,000
• Corporation Tax rate used for the notional tax step (illustration): 25%
  

The “net credit” concept still matters because HMRC calculates a net amount by deducting notional tax from the claim amount.  

So you still get to a simplified net figure of:

£20,000 − (25% × £20,000) = £15,000

Whether you actually receive cash (and how much, and when) depends on HMRC’s processing steps and whether any caps apply.

What about the PAYE/NIC cap?

If you’re in a position where part of the credit could be paid out, there’s a cap that can restrict the amount payable in the period (unless you’re exempt from the cap).  

Under the merged scheme (and ERIS), the PAYE cap amount is:

£20,000 + 300% of your company’s relevant PAYE and National Insurance liabilities for the period.  

If a merged scheme claim exceeds the cap, the excess is carried forward rather than paid out in that period.  

Enhanced R&D Intensive Support (ERIS)

ERIS is specifically for loss-making R&D-intensive SMEs. It gives:

• an extra 86% deduction on qualifying costs (total 186%) when calculating the adjusted trading loss; and  
• a payable credit worth up to 14.5% of the surrenderable loss (not taxable)
  

To qualify you must be loss-making and meet the 30% intensity condition (your relevant R&D spend is at least 30% of total expenditure, including connected companies).  

Example C: ERIS example

Assume:

• Qualifying R&D spend (QE): £100,000
• You are loss-making and have enough losses that the surrenderable amount is not restricted by your trading loss position
  

1) Work out enhanced R&D figure

Total enhanced deduction basis is 186% of QE:

£100,000 × 186% = £186,000  

2) Payable credit (up to 14.5%)

£186,000 × 14.5% = £26,970 (about 27p per £1 of QE)  

That “up to” matters. If your surrenderable loss is lower (because your adjusted trading loss isn’t big enough), the payable credit will be lower.

Two admin steps that can block a claim for either scheme if you miss them

Before HMRC will process the claim, you may need to do two extra things:

Claim notification form (in some cases)

For accounting periods beginning on or after 1 April 2023, you must submit a claim notification form if you’re claiming for the first time, or if your last claim was made more than 3 years before the end of the claim notification period.  

Additional Information Form (AIF)

You must submit the Additional Information Form before or on the same day as your Company Tax Return (and if you submit on the same day, the AIF must go first). If you don’t, the claim will not be accepted.  

Meeting the key deadlines is critical to a successful R&D tax claim.

Use our R&D tax calculator for a quick estimate

If you want a quick indicative figure, try our R&D tax calculator. It’s designed to give an illustrative estimate only based on the information you input and does not replace tailored advice. Your actual outcome will depend on things like how your qualifying expenditure is calculated, your wider tax position and scheme-specific rules (including caps and restrictions), especially if you’re loss-making, part of a group, or use subcontractors or overseas resource.