R&D Tax Credits for Small Companies: Save Up to 27% on Innovation Costs
If your company spends money solving technical problems — developing new products, processes, or services — you may qualify for R&D tax relief. For R&D-intensive small companies that qualify for the enhanced scheme, the benefit can reach up to 27% of qualifying expenditure as a cash payment from HMRC.
How R&D Relief Works (From April 2024)
From 1 April 2024, two R&D relief schemes are available:
The merged scheme applies to all companies (replacing the old SME and RDEC schemes for expenditure incurred from 1 April 2024). It provides a 20% above-the-line expenditure credit. Because this credit counts as taxable income, the actual net benefit is lower than 20%.
ERIS (Enhanced R&D Intensive Support) is a separate scheme for loss-making SMEs where qualifying R&D expenditure is at least 30% of total relevant expenditure. It uses an enhanced deduction mechanism to deliver a higher cash benefit.
| Scheme | Who it applies to | Mechanism | Effective benefit |
|---|---|---|---|
| Merged scheme | All companies from 1 Apr 2024 | 20% above-the-line credit (taxable income) | ~15% net at 25% CT rate |
| ERIS | Loss-making SME with R&D ≥30% of total spend | 86% enhanced deduction; surrenderable loss paid at 14.5% | Up to ~27% cash from HMRC |
Example: Profitable Company (Merged Scheme)
Your company spends £100,000 on qualifying R&D:
- Above-the-line credit: £100,000 × 20% = £20,000 (added to taxable income)
- Tax on the credit at 25% CT rate: £5,000
- Net CT reduction: £15,000 (15% of qualifying spend)
Example: Loss-Making R&D-Intensive Company (ERIS)
Your company spends £200,000 on R&D out of £500,000 total costs (40% — qualifies as R&D intensive):
- Total enhanced R&D deduction: £200,000 × 186% = £372,000
- Surrenderable loss (up to 186% of R&D spend): £372,000
- Payable cash credit: £372,000 × 14.5% = £53,940 from HMRC (~27% of the £200,000 R&D spend)
What Qualifies as R&D?
HMRC's definition is broader than you might think. It's not just lab work:
✅ Qualifying Activities
- Developing new software features or algorithms
- Creating new manufacturing processes
- Designing new products or improving existing ones
- Overcoming technical challenges that competent professionals can't easily solve
- Prototyping and testing
- Developing new materials or formulations
- Clinical trials and scientific research
❌ What Doesn't Qualify
- Routine software development (using well-known techniques)
- Market research
- Social science or economics research
- Arts, humanities
- Cosmetic or aesthetic changes
- Quality control (unless developing new methods)
- Simply applying existing knowledge
The Key Test
Ask: "Could a competent professional in this field readily solve this problem?" If no — if there's genuine technological uncertainty — the work may qualify.
Qualifying Costs
| Cost Type | Qualifies? |
|---|---|
| Staff costs (salary, NIC, pension) | ✅ |
| Subcontractor costs | ✅ (65% of cost) |
| Materials consumed in R&D | ✅ |
| Software licences used for R&D | ✅ |
| Utilities (power, water, fuel for R&D) | ✅ |
| Capital equipment | ❌ (use capital allowances) |
| Rent | ❌ |
CT600 Reporting
R&D relief is claimed via the CT600L supplementary page. You also need to complete several indicator boxes on the main CT600:
| Box | Description |
|---|---|
| Box 142 | Tick to confirm the CT600L supplementary page is attached |
| Box 650 | Tick if the claim is made by a SME (including R&D-intensive SMEs) |
| Box 653 | Tick if claiming under ERIS (R&D-intensive SME scheme) |
| Box 656 | Tick to confirm the R&D claim notification form has been submitted to HMRC |
| Box 657 | Tick to confirm the R&D additional information form has been submitted to HMRC |
| Box 530 | R&D expenditure credit amount (carried from CT600L calculations) |
You'll also need:
- A written technical narrative explaining the R&D and the technological uncertainties
- Breakdown of qualifying costs
- Advance notification to HMRC (required from April 2023 for new claimants — notify within 6 months of the period end)
- An additional information form submitted to HMRC before (or with) the CT600 — required since August 2023
Common Mistakes
- Not claiming at all — many companies don't realise they qualify
- Over-claiming — HMRC has significantly increased compliance activity; ensure genuine technological uncertainty
- Poor documentation — write the technical narrative as you go, not retrospectively
- Missing the advance notification — new claimants must notify HMRC within 6 months of period end
- Including non-qualifying costs — capital equipment and rent don't qualify
- Missing the additional information form — required since August 2023 and must be submitted before the CT600
Filing an R&D Claim
R&D claims require the CT600L supplementary page alongside the main CT600. HMRC has significantly increased compliance scrutiny of R&D claims in recent years. Most claimants work with an R&D tax specialist or accountant who prepares the technical narrative, cost schedule, and additional information form, then files the CT600 and CT600L through agent software.
Filing a standard CT600 without an R&D claim? Start with Taxpipe — £59, no hidden fees.