Can my small business claim R&D tax credits?

R&D tax relief is a Corporation Tax relief, so it is available to companies only. Sole traders and partnerships pay income tax and are outside the scheme entirely — one reason some genuinely innovative unincorporated businesses consider incorporating.

What counts as R&D

The test is whether the project sought an advance in science or technology by resolving a scientific or technological uncertainty — something a competent professional in the field could not readily deduce. That is far broader than most people assume. Developing a new product, process or service, or appreciably improving an existing one, can qualify in manufacturing, construction, software, agriculture or food production.

Qualifying costs include staff salaries with employer NIC and pension, consumables used up in the R&D, software used directly in it, and since April 2023 data licences and cloud computing. Subcontracted R&D counts partially — broadly 65% of the cost where the subcontractor is unconnected.

Which scheme, and how much

• The merged scheme applies to most companies for accounting periods beginning on or after 1 April 2024. It gives a 20% above-the-line credit on qualifying expenditure. The credit is taxable, so a profitable company paying 25% Corporation Tax nets roughly 15% of qualifying spend. Loss-makers can surrender it for cash.
• Enhanced R&D Intensive Support (ERIS) is for loss-making SMEs whose qualifying R&D is at least 30% of total expenditure. It gives a 45% enhanced deduction plus a 14.5% payable credit — a net cash benefit of around 27% of qualifying spend, which matters enormously to pre-revenue companies.

Claims go through the CT600. Since August 2023 first-time claimants, and anyone who has not claimed in the previous three years, must file an Additional Information Form before the return; submit the CT600 without it and the claim is rejected outright.

Treat the claim as seriously as any other part of the return. HMRC sharply increased scrutiny after a wave of inflated claims, and penalties run from nothing for a careless error disclosed unprompted to 100% of the tax underpaid for deliberate misrepresentation. Keep contemporaneous project records rather than reconstructing them at year end, record R&D staff time on timesheets, and identify qualifying projects before the year closes. Straightforward claims are processed in about 28 days; those pulled for a compliance check take three to six months. A specialist adviser helps, but the director signing the return remains responsible. Grant funding can be combined with a claim, though the grant must be declared and will usually reduce the qualifying expenditure.