R&D tax credits are a fantastic government incentive designed to reward companies for investing in innovation. It lets you reduce your corporation tax bill or, in some cases, claim a cash refund, giving you some breathing room when it comes to developing new products and services.
For many UK companies, these credits represent a seriously helpful financial boost that can be reinvested into further innovation. But figuring out how to calculate R&D tax credits can feel pretty complex at first, particularly because there are different schemes with varying rates and rules.
By the end of this guide, you'll understand how to calculate your potential R&D tax credit and what steps to take to make a claim.
Understanding the R&D Tax Credit Schemes
The UK has multiple R&D tax credit schemes, and which one applies to you depends on your size, profitability, and how your R&D is funded.
Recently, the UK government changed how R&D tax credits work in an effort to simplify the system.
For accounting periods beginning on or after 1 April 2024, all claims go through the Merged Scheme (or ERIS, if you qualify).
For accounting periods beginning before 1 April 2024, you'll need to claim through the SME or RDEC scheme.
For more information on the SME or RDEC scheme, check out our blog.
SME Scheme and ERIS Scheme
The SME scheme is the original version of the UK's R&D tax credit incentive, giving out much-needed cash refunds to companies since 2001. As it enters its final chapter, companies can still claim through the SME scheme as long as their accounting period starts before 1 April 2024.
To qualify, your business must have fewer than 500 employees and either an annual turnover below €100 million or a balance sheet total under €86 million.
Companies can tap into two types of relief through the SME scheme. If you're profitable, you can get a tax reduction that lowers your corporation tax bill. If you're loss-making, you can swap those losses for a cash credit paid directly by HMRC.
For loss-making SMEs that are R&D intensive, there's a separate scheme called the Enhanced R&D Intensive Support (ERIS) scheme that offers more generous relief. To qualify for ERIS, you need R&D expenditure equal to at least 30% of your total expenditure, plus you need to meet the SME size criteria and be loss-making.
Through these schemes, SMEs can deduct an extra 86% of their qualifying costs in calculating their adjusted trading loss, on top of the 100% deduction that already appears in the accounts, making a total of 186% deduction.
This'll either reduce your taxable profits (hello, lower tax bill!) or your losses can be cashed in for a payable tax credit.
For more information on the ERIS scheme, check out our blog here.
RDEC Scheme and the Merged Scheme
Just like the SME scheme, the R&D Expenditure Credit (RDEC) scheme is being phased out and replaced by the Merged Scheme. However, before this change, large companies and some SMEs had to claim through the RDEC scheme (and still can if their accounting period begins before 1 April 2024).
The Merged Scheme works basically the same way as RDEC, with just some minor tweaks to eligible costs.
Both the Merged Scheme and RDEC provide an above-the-line taxable credit, which means it shows up in your profit and loss account before tax and gets taxed itself.
For more information on the Merged Scheme, check out our blog here.
Step-by-Step: How to Calculate Your R&D Tax Credit
Step 1: Identify Qualifying R&D Projects
First things first—make sure you actually have a claim! Only projects that meet HMRC's definition of R&D count. This means finding work that's trying to achieve an advance in science or technology by solving scientific or technological uncertainty.
Work closely with your technical team to document what each project was about and the specific scientific or technological challenges you ran into. Record what you tried to achieve, what uncertainties you dealt with, and how you tackled them; this is crucial for your Additional Information Form.
Step 2: Gather Eligible Costs
Once you've identified your qualifying projects, it's time to gather the costs. Eligible costs include:
- Staff Costs
- Subcontractors
- Externally Provided Workers
- Software Licenses, Data Licenses and Cloud Computing
- Consumable Items
- Clinical Trial Volunteers
Some costs won’t make the cut, including capital expenditure on land, buildings, or plant and machinery, indirect costs like rent and rates, and interest and service charges on finance.
Step 3: Apportion Costs
Not all costs are going to be 100% R&D-related. You'll need to split costs to reflect only the time or resources actually spent on qualifying activities.
For example, if a software developer spent 60% of their time on R&D projects during the year, you'd claim 60% of their total employment costs. Same goes for materials, subcontractors, and other resources.
Keep detailed records to back up your calculations; HMRC might come knocking for evidence.
Step 4: Apply the Appropriate Scheme Rate
The rate you use depends on which scheme you're claiming under.
Under the SME and ERIS schemes, you can claim an enhanced deduction of 186% of qualifying expenditure, meaning for every £100 spent on R&D, you can deduct £186 from taxable profits.
If you're loss-making, you can trade the loss for a cash credit at 10% for accounting periods beginning on or after 1 April 2023, or 14.5% under the ERIS scheme.
For the Merged Scheme and RDEC, you'll get a taxable credit of 20% of qualifying R&D expenditure. This credit bumps up your taxable profits, so the actual benefit is less than the headline rate once corporation tax comes into play. Depending on your corporation tax rate, you'll pocket a net benefit of either 15% or 16.2%.
How to Claim R&D Tax Credits
You’ll submit your R&D tax credit claim through your CT600 company tax return.
Since August 2023, HMRC requires everyone to fill out an Additional Information Form with their claim. This form takes details about your R&D projects, including a technical narrative explaining the scientific or technological uncertainties you tackled, plus a breakdown of your claimed costs. This requirement means you've got to put more effort and detail into your claims than you might be used to.
Some companies need to submit an Advance Notification Form too. This is just an online form where you give HMRC a heads-up that you'll be making a claim for R&D tax relief/expenditure credit. It's mandatory for first-time claimants and anyone who hasn't claimed in the last three years, and it needs to be in within 6 months of your accounting period ending.
Should You Use an R&D Tax Consultant?
Plenty of companies turn to specialist R&D tax consultants to prep and submit their claims. The perks include getting expert help with both the technical definitions of qualifying R&D and the tricky tax calculations. A solid consultant makes sure your claim is accurate, ticks all HMRC's boxes, and gets you the maximum you're entitled to.
That said, be careful when picking a consultant. Steer clear of firms offering guarantees without discussing your projects or pushing toward aggressive or padded claims that might not hold up under HMRC's microscope. Look for consultants with upfront, transparent fees and a proven track record of playing by HMRC's rules.
Summary and Key Takeaways
Calculating R&D tax credits boils down to five key steps: identify qualifying R&D projects, gather eligible costs, split those costs to R&D activities, apply the right scheme rate, and claim your final benefit.
Even small-scale innovation can qualify for relief, so don't write off your work as too minor or incremental. What matters is whether you faced real scientific or technological uncertainty that needed some digging and experimenting.
Keeping good records throughout the year makes claiming way easier. Document your projects as you go, track time spent on R&D, and hang onto evidence of how you problem-solved.
If you want a rough estimate of your R&D tax credit value, don’t miss Tax Cloud’s R&D tax calculator. For any more information on calculating your R&D tax credit, get in touch with our expert team; we’ve seen it all and we’re happy to help!
