How To Claim R&D Tax Credits for Startups And SMEs?

What are R&D Tax Credits?

R&D tax credits are a UK government incentive designed to reward innovation. If your business spends money developing new products, processes, or technology, especially when tackling scientific or technical uncertainty, you could claim back a portion of that spend.

As of April 2025, the government has merged the previous SME and RDEC schemes into a single R&D tax relief framework. Now, all UK companies subject to Corporation Tax claim under the merged scheme, which provides an expenditure credit of up to 20% of qualifying R&D costs. That credit is taxable, but still results in a real cash benefit, especially for startups building toward product-market fit.

In plain terms: if your team is building something technically challenging or developing something that didn’t already exist, you could be owed thousands.

And no, this isn’t just for scientists in lab coats. It applies to:

• SaaS companies building custom backend systems or solving scalability issues
• eCommerce teams developing fulfilment algorithms or recommendation engines
• Food & beverage brands experimenting with shelf life, packaging, or formulations
• Consumer goods companies are improving performance through prototyping or testing

Whether you’re pre-seed or post-Series A, the merged scheme helps you reinvest in innovation and keep growing.

How to Claim R & D Tax Credits Without Outsourcing?

You’ve already done the hard part, building, experimenting, and problem-solving. Now it’s about translating that work into a claim HMRC understands (and approves).

First things first:
If this is your first time claiming R&D tax relie or you haven’t claimed in the last 3 years, you’ll need to notify HMRC using a claim notification form. This must be submitted within six months of the end of your accounting period, or your claim will be invalid. Don’t skip this step.

Here’s how the full process works under the 2025 merged scheme:

Step 1: Identify Your R&D Projects and Costs

Start by pinpointing the projects where your team tackled technical or scientific challenges. This might include:

• Software development
• Product formulation
• Custom integrations
• Scalable infrastructure work

Then map the time, people, and money involved:

• Which employees worked directly on the R&D?
• What tools, software, or contractors supported the work?
• What proportion of utilities powered eligible activity?

Pro tip: You don’t need one “big” project. Multiple small projects may qualify, as long as they involve real technical problem-solving.

Step 2: Build Your Technical Narrative

HMRC isn’t just looking for numbers, they want context.

In your Additional Information Form (AIF), you’ll need to explain:

• What technical problem did you set out to solve
• Why wasn’t it straightforward
• What uncertainties did you encounter
• How did you work through them using a process of testing, iteration, or experimentation

If your claim includes three or fewer projects, you’ll need to include narratives for all. For four or more, select at least three projects that together represent 50% or more of the total R&D spend.

Step 3: Crunch the Numbers

Now calculate your qualifying costs:

• Staff time and salaries
• Contractor/subcontractor costs
• Software and cloud tools
• Materials used in prototyping
• Utilities and eligible capitalised expenditure

You’ll then apply the 20% expenditure credit (under the merged scheme). The resulting credit is taxable, but still offers a net benefit of around 15–16%, depending on your tax position.

Tools like Xero, Dext, and your payroll platforms like Accountancy Cloud make this easier, especially if you’ve been tagging R&D-related spend from day one.

Step 4: Submit Your Claim via Your CT600

You’ll submit your R&D claim as part of your Company Tax Return (CT600), including:

• The completed CT600L supplementary section
• Your Additional Information Form with narratives and cost breakdown
• The Claim Notification Form (if required)

Most claims are processed by HMRC in 4–6 weeks, but clear documentation can help speed this up and reduce the risk of queries or audits.

Who is Eligible to Claim R&D Tax Credit?

If your company is solving scientific or technical problems, there’s a strong chance you qualify for the UK’s R&D tax relief, even if you're early-stage, loss-making, or haven’t brought a product to market yet.

As of April 2025, the UK government has merged the SME and RDEC schemes into a single R&D tax relief framework. This new scheme applies to all UK companies subject to Corporation Tax, regardless of size or profitability.

Your Company Must:

• Be a UK-based limited company
• Be subject to UK Corporation Tax
• Have spent money on qualifying R&D during the accounting period

Your Project Must:

• Aim to make an advance in science or technology, not just a commercial improvement
• Involve technical or scientific uncertainty that a competent professional couldn't easily resolve
• Follow a process of testing, prototyping, or iteration to overcome that uncertainty

What Doesn’t Qualify:

• Design or cosmetic improvements without technical complexity
• Market research or competitor analysis
• Routine operational tasks like data entry, customer service, or admin
• Work in the arts, humanities, or social sciences

Even if the project didn’t succeed or reach a final product, you can still claim, what matters is the attempt to solve a real technical challenge.

Additional Support for R&D-Intensive SMEs

If you're a loss-making company and at least 30% of your total expenditure relates to qualifying R&D, you may be eligible for enhanced support through the R&D-intensive (ERIS) route. This allows for a higher payable credit rate under the merged scheme.

Did you know? Food and drink businesses can also qualify. Here’s how.

What Counts as R&D Activity?

Now that you know the eligibility rules, let’s talk about what R&D actually looks like inside a business, because it’s more common than most founders realise.

Under the merged scheme introduced in April 2025, HMRC uses the same core definition of R&D as before: your activity must aim to advance science or technology while facing technical uncertainty that couldn’t be easily solved by a competent professional.

This means you're exploring unknowns, testing new ideas, and developing or improving systems, processes, or products in a way that goes beyond routine work.

Examples of Qualifying R&D Activity:

• Software Development
  Building or customising platforms, data pipelines, APIs, or integrations where off-the-shelf solutions weren’t suitable.
• Consumer Product Innovation
  Experimenting with new materials, improving performance, or extending shelf life through formulation or testing.
• Manufacturing & Supply Chain
  Solving bottlenecks through automation, new tooling, or scalable production techniques that require trial and error.

Importantly, your work does not have to succeed to qualify. As long as the project involved resolving technical uncertainty through experimentation, the costs may be claimable.

If you're pushing boundaries in your industry and documenting the process, you’re likely doing exactly the kind of work this incentive was designed to support.

What R&D Costs can you claim for?

Once you've identified your qualifying R&D activity, the next step is understanding which costs you can include in your claim under the merged R&D scheme.

The good news? Many of the costs tied directly to your R&D work are eligible, especially if they relate to people, software, materials, and support services used to solve technical challenges.

1. Staff Costs

You can claim for employees who directly contribute to R&D projects, including:

• Salaries
• Employer National Insurance contributions
• Employer pension contributions

This includes developers, engineers, data scientists, product specialists, and even founders, provided they were involved in hands-on technical work.

2. Subcontractors and Externally Provided Workers

Costs for third-party specialists or development partners who helped deliver parts of the R&D project can be included, though how much you can claim depends on contractual arrangements.

Under the merged scheme, subcontractor costs remain eligible, but overseas work is more restricted. Generally, costs for R&D conducted outside the UK won’t qualify unless the work couldn’t reasonably be done in the UK due to factors like legal or environmental conditions.

3. Software and Cloud Services

You can include the cost of:

• Software licences used in R&D (e.g. development environments, analytics tools)
• Cloud hosting costs are directly related to development and testing

These need to be directly attributable to R&D activities and clearly documented.

4. Consumables

This includes materials that are transformed or used up in the course of R&D work. Examples include:

• Raw materials used in prototypes
• Packaging materials for trial runs
• Test components in hardware development

Note: Anything that ends up in the final product sold to customers is generally excluded.

5. Utilities

A portion of your electricity, water, and fuel bills can be claimed if they support R&D work. This is particularly relevant for physical product development, manufacturing, or lab-based innovation.

6. Capitalised Expenditure

In some cases, development costs capitalised on your balance sheet (rather than expensed through your P&L) can still qualify, provided they relate to eligible R&D and meet HMRC’s criteria.

This may apply to software development or intellectual property that’s treated as an intangible fixed asset.

Want to know what this means in the real world? Here’s how Budget 2021 impacted R&D cost eligibility.

R&D Tax Relief Rates (and What Do They Mean for Your Bottom Line?)

As of April 2025, all R&D tax relief claims fall under the merged scheme. This unified system simplifies the process and applies the same baseline rules to all UK companies subject to Corporation Tax.

The Merged Scheme – Key Rate

• 20% Expenditure Credit
  All qualifying R&D expenditure can attract a 20% expenditure credit.
• Taxable Credit
  This credit is taxable, meaning the net benefit you receive depends on your corporation tax rate. In most cases, companies see an effective benefit of around 15–16.2% of qualifying costs.

So for every £100,000 of eligible R&D spend, you could receive a benefit worth approximately £15,000–£16,200, either as a reduction in your tax bill or as a payable credit if you're loss-making.

Learn more about the SME scheme cap here.

Enhanced Support for R&D-Intensive Companies

If you're a loss-making SME and spend 30% or more of your total business expenditure on qualifying R&D, you may qualify for enhanced support under the R&D-intensive pathway (formerly known as ERIS).

• Higher Payable Credit
  These companies can claim a non-taxable payable credit worth 14.5% of the surrenderable loss, offering more generous support compared to the standard merged scheme.

This enhanced route is especially valuable for early-stage startups investing heavily in product development or scientific research.

No More SME vs RDEC

The previous distinction between the SME scheme and the RDEC scheme is no longer relevant. All companies now follow this single structure, making it easier to apply and compare benefits across industries.

How Far Back Can You Claim R&D Tax Relief?

R&D tax credits are generous, but time-limited. If you miss the deadline, you miss the opportunity entirely, even if the work is qualified.

Under the current rules, you can make a claim for R&D tax relief up to two years after the end of the accounting period in which the R&D expenditure was incurred.

Example:

If your financial year ended on 31 March 2023, you have until 31 March 2025 to submit your R&D claim for that period.

Why Timing Matters:

• HMRC is strict- late claims aren’t accepted, even if the R&D work was eligible.
• Faster submission = faster payout- most claims are processed in 4 to 6 weeks.
• Avoid last-minute headaches- leaving it too late can lead to lost records, inaccurate cost breakdowns, or missed claim notification requirements.

First-time claimant?

If you’re claiming for the first time (or if it’s been more than three years since your last claim), you must also submit a Claim Notification Form within six months of your accounting period end. If you miss this, your claim will be blocked, even if everything else is correct.

Here’s how R&D tax credits are treated in your tax return.

How Real Founders Turned R&D into Funding with Accountancy Cloud

R&D tax relief isn’t just a back-office bonus, it’s often the difference between extending runway and pausing product development. At Accountancy Cloud, we’ve helped hundreds of startups and scale-ups turn their technical work into strategic cash flow.

Take Intropic After switching to Xero and working with our team, they cut operational costs by 50% and claimed a five-figure R&D tax credit, money that went straight back into growth. For OLIO, a high-growth sustainability app, R&D claims weren’t an afterthought, they were part of the fundraising story. From pre-seed to Series B, we helped them build a financial foundation that included robust, defensible claims to HMRC.

These aren’t edge cases, they’re founders building fast, solving real technical challenges, and claiming what they’re owed with expert support.

Want to see what’s possible for your business? Let’s talk.

Conclusion

Founders don’t innovate for tax relief, but if you’re investing in new products, building custom tech, or solving hard problems for innovative projects, this government incentive, including tax incentives, is designed to support exactly that. The R&D tax credit lets you turn qualifying costs, like staff time, software licences, or pension contributions, into real savings on your corporation tax liability or even a direct cash payment.

There’s a strict time limit: two years from the end of the accounting period. Miss that window, and your tax relief claim disappears, even if the R&D work was genuine. That’s why timing, clarity, and proper support matter, especially if your total expenditure on qualifying activity from a single project could materially reduce your tax liability.

So if you’re wondering how to claim R&D tax credit without burning time or introducing HMRC risk, speak to someone who understands the process from both a tax and startup perspective, leveraging their years of experience to ensure a successful claim. You’ve already done the hard work; let the claim reflect it.

Frequently Asked Questions

How to claim r & d tax credit for the first time?

To claim R&D tax credit for the first time, your company must first identify a qualifying activity, apportion qualifying costs, and prepare a technical report as part of an additional information form. If you haven’t claimed in the past three years, you’ll also need to submit a claim notification form within six months of your year-end. The full claim, including technical details and cost breakdown, is submitted through your corporation tax return. Timing matters; late notification can block your claim, even if you’re fully eligible.

What qualifies as R&D under HMRC’s rules?

HMRC recognises R&D as work that seeks to overcome scientific or technological uncertainties. and technological principles. This means your project must push boundaries that a competent professional couldn’t easily solve, whether through experimental development, testing, or iterative technical improvements by your development team. Qualifying work may include software builds, formulation development, custom manufacturing processes, or clinical trials, but must exclude commercial, cosmetic, or purely aesthetic changes.

How does the new merged scheme affect future claims?

From April 2025, any R&D tax relief claim must be made under the new merged RDEC regime scheme, regardless of whether your business previously qualified for the SME or RDEC scheme. The merged scheme brings a standardised expenditure cash credit, simplifies the structure.

Can loss-making companies still benefit from R&D tax relief?

Yes, and this is one of the biggest advantages of the scheme for early-stage startups. If your corporation tax liability is low or nil due to trading losses, you can convert the notional tax relief into a payable credit. This provides a direct cash injection based on your total qualifying expenditure, which can be used to extend runway, fund further innovation, or invest in operational growth in your group company. Enhanced support is also available for R&D-intensive SMEs.

What is the time limit for submitting a claim?

There is a strict two-year window from the end of the accounting period in which the R&D took place, specifically the accounting year end. For example, if your year ended 31 March 2023, your R&D claim must be submitted by 31 March 2025. If you miss this deadline, the opportunity to reduce your tax liability or claim a payable credit is lost entirely, even if all qualifying costs were correctly incurred and documented with a sufficient level of detail.

Do subcontracted or third-party R&D costs qualify?

Yes, many subcontractor and third-party associated costs can be included in your R and D tax relief claim, especially under the merged scheme. This includes agencies, consultants, development partners, or third-party external labs conducting eligible work on your behalf. However, the nature of the relationship, contractual structure, and clarity of the qualifying activity will influence how much you can claim. It's crucial to keep detailed records and link these costs clearly to the R&D narrative provided in your additional information form.