Kirk Rice Blog

R&D Tax Relief For SME’sWritten on May 16, 2026 by Gauhar Chaudhary

The Question:

We are a software company developing a new platform and encountered technical challenges during development. Could we qualify for R&D tax relief?

Gauhar Chaudhary answers:

A long history servicing OMBs and SMEs has meant I hear this question a lot.

Could you qualify for R&D tax relief? In short, maybe.

R&D tax relief may be available where a company is seeking an advance in science or technology and has to overcome genuine technological uncertainty. In software, qualifying work can include solving complex technical problems, not just creating something entirely new.

What is R&D tax relief?

R&D tax relief is a corporation tax incentive for companies investing in qualifying research and development. For accounting periods beginning on or after 1 April 2024, the UK operates a merged R&D scheme for most companies. Broadly, that scheme gives an above-the-line taxable credit equal to 20% of qualifying R&D expenditure.

A separate enhanced regime remains available for certain loss-making research-intensive SMEs. Broadly, those companies may claim an additional deduction of 186% on qualifying R&D expenditure, and a payable credit at 14.5% of surrenderable losses may also be available.

The merged scheme replaced the previous distinction between the old SME scheme and the old RDEC scheme for most claimants.

How does the current regime work?

General merged scheme

For accounting periods beginning on or after 1 April 2024, most companies claim relief through the merged scheme. The credit is brought into account above the line as a trading receipt. In broad terms:

• the credit rate is 20% of qualifying R&D expenditure;
• the credit is taxable, so the net benefit depends on the company’s corporation tax rate;
• the credit can increase taxable profits or reduce losses.

Research-intensive SME regime

A loss-making SME may instead qualify for the enhanced research-intensive SME regime. Broadly:

• the company must be an SME and meet the research-intensity test;
• from 1 April 2024, the threshold is broadly 30% of total expenditure on qualifying R&D, reduced from the earlier 40% threshold;
• qualifying expenditure attracts an additional deduction of 186%;
• a payable credit may be available at 14.5% of surrenderable losses.

A research-intensive SME cannot claim both that enhanced SME relief and the merged scheme for the same expenditure.

What counts as qualifying R&D?

Broadly, qualifying R&D must take place within a project seeking an advance in science or technology, and the work must directly contribute to resolving scientific or technological uncertainty.

This is not limited to laboratories or manufacturing. Software projects can qualify where they involve genuine technological uncertainty. However:

• routine development is not enough;
• simply adapting or integrating existing technology may not qualify;
• the company should be able to explain the technological advance sought, the uncertainties encountered, and why those uncertainties were not readily resolvable by a competent professional.

There is also an important trading requirement in some contexts. Expenditure must be properly connected with the company’s trade and deductible in computing trading profits where the legislation requires that link.

What expenditure can qualify?

Broadly, qualifying expenditure must be revenue rather than capital and attributable to qualifying R&D activities undertaken by the company itself or contracted out by it.

The categories commonly include:

• staffing costs;
• externally provided workers;
• software;
• data licences;
• cloud computing services;
• consumable or transferable materials;
• payments to clinical trial participants;
• certain contracted-out R&D costs.

For staffing and externally provided workers, the relevant individuals must be directly and actively engaged in the R&D.

Under the post-1 April 2024 rules, relief for externally provided workers is generally limited to workers paid through PAYE with tax deducted at source and subject to NICs.

Overseas restriction

Since 1 April 2024, there is a territorial restriction. Broadly, relief is generally available only where the R&D activity is undertaken in the UK, subject to limited exceptions.

An exception may apply where:

• conditions necessary for the R&D exist overseas and are not present in the UK, and it would be wholly unreasonable to replicate them in the UK; or
• legal or regulatory requirements mean the activity must take place outside the UK.

Cost or staff availability alone will not normally justify overseas relief.

Contracted-out R&D

The current scheme is more accommodating for contracted-out R&D than the old large-company rules, but the contractual analysis matters. Broadly, relief may be available where:

1. there is a contract between the claimant and another party for activities to be undertaken;
2. those activities include R&D; and
3. when the contract was entered into, it was reasonable to assume from the contract terms and surrounding circumstances that the claimant intended or contemplated that R&D would be undertaken.

This means the drafting of statements of work, technical specifications and project documentation can be important in establishing entitlement.

Claim mechanics and notification

Companies also need to be aware of the claim notification rules.

A company may not make an R&D claim after the end of the claim notification period unless certain conditions are met, such as having made a recent R&D claim or having submitted a claim notification within the relevant time limit.

HMRC has highlighted that some claimants, especially first-time claimants, need to notify HMRC within six months of the end of the accounting period if the notification rules apply.

HMRC also offers an online interactive checker intended to help businesses assess whether a project is likely to qualify and what information is needed before a claim is submitted. Use of the tool does not guarantee that a claim will be accepted.

Example calculations

• Example 1: Company claiming under the merged scheme

If a company incurs £100,000 of qualifying R&D expenditure, the merged scheme gives a 20% taxable credit, so the gross credit is £20,000.

If the company pays corporation tax at 25%, the post-tax value is broadly £15,000. If it pays at the small profits rate of 19%, the post-tax value is broadly £16,200.

• Example 2: Loss-making research-intensive SME

If a qualifying loss-making research-intensive SME incurs £100,000 of qualifying R&D expenditure, it may claim an additional deduction of 186%, subject to the detailed rules.

If it has a surrenderable loss, a payable credit may be available at 14.5% of that surrenderable amount. The precise cash benefit depends on the company’s loss position, the amount of unrelieved loss, and whether the company satisfies the research-intensity conditions.

Get in touch with Kirk Rice about R&D tax relief

If you are developing software, automating internal systems, improving data processing, or solving difficult engineering or technical problems, you may have a valid R&D claim.

The rules are now more complex than under the old SME and RDEC regimes, particularly where claim notification, subcontracted R&D, overseas activity, or research-intensive SME status is relevant.

A careful review of the project objectives, technical uncertainties, qualifying costs and filing position is essential. We can help you identify if your project is eligible for a claim and support you from start to finish in making a successful claim.

If you have a tax question relating to your company, please call us on 01844 875 000 or email us at info@kirkrice.co.uk 

Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.