What are R&D Tax Credits?

R&D (Research & Development) tax credits are government incentives designed to encourage companies to invest in innovation. They allow eligible companies to reduce their Corporation Tax liability or, in some cases, receive a cash payment

The idea: if your company is pushing boundaries in science or technology — developing new products, processes, or improving existing ones in a way that involves technical uncertainty — some of those costs may attract generous tax relief.

Who Can Claim?

Not every business qualifies. Here are the main criteria:

• You must be a company (i.e. subject to UK Corporation Tax). Individuals, sole traders, partnerships (in their personal capacity) do not claim via R&D tax credits.

• The project must seek an advance in science or technology — i.e. going beyond what is already known or straightforward for a competent professional in your field.

• The project should involve uncertainty (i.e. you don’t know in advance exactly how to solve it) and must be carried out in a systematic way (e.g. trials, prototyping, testing)

• The costs claimed must relate to eligible R&D activities — e.g. staffing, materials, software, subcontractor costs in some cases, etc.

Because of the technical nature of the eligibility, many companies consult specialist advisors to ensure their project qualifies.

What Costs Qualify?

Here are some of the typical cost categories you may be able to include (provided they relate to qualifying R&D work):

• Salaries, employer NICs, pension contributions for staff working directly on R&D

• Software and licenses used for R&D

• Cloud Computing Costs

• Consumables, materials, utilities (power, heating) used up in R&D

• Subcontractors or externally provided workers (under certain rules)

• Some costs of prototyping, testing, trials

However, there are also restrictions, so it’s best to consult with a specialist to confirm.

Risks, Compliance & HMRC Scrutiny

Because R&D relief is generous, it has also been a target for abuse, aggressive claims, and noncompliance. HMRC has been increasing its compliance activity, and companies need to be careful.

Key risks / caution points:

• Making claims for projects that don’t genuinely involve scientific or technological uncertainty

• Poor documentation of how costs link to R&D activities

• Incorrect treatment of subcontractor costs, overseas costs, or grant-funded work

• Over claiming or not adjusting for grants or other funding

• Failing to respond properly to HMRC enquiries

Best Practices & Tips for Maximising Your Claim

To make the most of R&D tax credits while reducing audit risk:

1. Document thoroughly
   Keep clear records showing what the technical challenge was, why it was uncertain, what experimentation was done, and how costs map to those activities.

2. Segment your R&D work
   Break down project phases, distinguish between core R&D vs supporting work, and allocate costs properly.

3. Use specialist advice or software
   R&D claims are complex. A good adviser or specialist tool can spot opportunities (e.g. for R&D intensity uplift) and reduce error.

4. Be conservative in borderline cases
   Don’t force projects into an R&D claim if the uncertainty or advance is marginal. It’s better to make a smaller claim that is robust.

5. Review and update claims
   If rules or your circumstances change, be ready to adjust your claim.

6. Stay ahead of compliance trends
   Monitor HMRC’s guidance, case law, and compliance updates. The landscape is evolving (especially with the merged scheme).