R&D Tax Relief Explained
Understanding R&D tax in an increasingly scrutinised environment
R&D tax relief remains valuable, but the way claims are assessed and prepared has changed.
Understanding what can genuinely be supported is now more important than ever.
Why R&D tax relief exists
The UK Government introduced R&D tax relief to encourage investment in innovation, recognising the cost and risk involved in developing new or improved products and processes.
However, the way this is interpreted in practice requires careful consideration of both the work undertaken and the legislative framework.
How eligibility is assessed
Eligibility is not determined by company size or sector alone.
It depends on whether the work undertaken meets the legislative definition of R&D. Specifically, whether it involves resolving scientific or technological uncertainty.
How claims are calculated
The value of an R&D claim depends on the qualifying expenditure and the applicable scheme.
However, the key consideration is not the amount claimed, but whether the underlying work and costs are accurately identified and properly supported.
What types of work may qualify
Qualifying activity typically involves attempts to resolve scientific or technological uncertainty.
This may include:
- Overcoming technical challenges
- Trialling new or substituting materials
- Streamlining processes
- Industry firsts
- Creating and testing prototypes
- Developing bespoke software
- Trial and error
Where claims go wrong
Many claims fall short not because the work is invalid, but because of how it is assessed and presented
Common issues include:
- Overly broad interpretations of eligibility
- Insufficient technical detail
- Reliance on standardised templates
- Weak alignment between work and evidence
Understanding the current R&D tax framework
The UK R&D tax landscape has undergone significant change, with the introduction of new schemes and revised rules.
While the structure appears simpler on the surface, the practical application has become more complex. Particularly in how eligibility and qualifying expenditure are assessed.
Merged Scheme
The Merged Scheme replaced the old SME and RDEC regimes for most claimants, bringing in a single set of qualifying rules.
Key features include:
- A single 20% taxable credit, giving an effective net benefit of around 14.7%–16.2% of qualifying R&D spend, depending on your Corporation Tax rate.
- Updated, unified rules for contracted-out and subsidised R&D, broadly following the previous RDEC approach.
- Restrictions on overseas R&D costs, with relief only available in limited circumstances where it would be wholly unreasonable to undertake the work in the UK.
Enhanced R&D Intensive Support
ERIS provides additional support to loss-making, R&D-intensive SMEs whose qualifying R&D accounts for 30% or more of their total expenditure.
Under ERIS:
- Companies can claim an additional 86% deduction of qualifying R&D costs when calculating their trading loss.
- That loss can generate a payable tax credit of up to 14.5% of the surrenderable loss.
- Combined, this can deliver an effective cash benefit of up to around 27% of qualifying R&D expenditure for eligible, loss-making SMEs.
Patent Box relief
Patent Box is a government-backed tax relief that allows companies to apply a reduced Corporation Tax rate of 10% to profits derived from patented inventions.
It applies to income from patented products, processes and technologies, recognising and rewarding the commercial success of innovation.
Eligibility criteria
Eligibility is not determined by meeting a simple set of criteria.
It requires assessing whether the work undertaken meets the legislative definition of R&D, and whether the associated costs are correctly identified and supported.
Applying multiple reliefs correctly
Where appropriate, we support the application of both R&D tax relief and Patent Box.
The focus is not simply on combining reliefs, but ensuring they are applied accurately, consistently and in line with the underlying activity.
How the rules have changed
Recent changes to the R&D tax framework have altered both the structure of the schemes and the level of scrutiny applied to claims.
While previous regimes (SME and RDEC) operated under separate rules, the introduction of the Merged Scheme has created a more unified structure. But with greater emphasis on accuracy and supporting evidence.
In practice, this means that how a claim is assessed and prepared is now more important than ever.
Changes in claim rates
The figures below provide a high-level comparison of historical and current rates.
However, the value of a claim is ultimately dependent on the underlying work and how it is assessed.
| Component Type | SME scheme | RDEC scheme | SME scheme | RDEC scheme | ERIS scheme | RDEC scheme |
|---|---|---|---|---|---|---|
| Loss-making SMEs | Up to 33.35% | – | Up to 18.60% | – | – | Up to 16.20% |
| Profit-making SMEs | Up to 24.70% | – | Up to 21.50% | – | – | Up to 16.20% |
| R&D-intensive SMEs | – | – | Up to 26.97% | – | Up to 26.97% | – |
| Large companies | – | Up to 10.53% | – | Up to 15.00% | – | Up to 16.20% |
If you would like to understand how these changes may affect your position, we are happy to provide an initial perspective.
Get in touch
Contact us to arrange an initial no-obligation consultation to find out how Knight can assist with your next claim or add value to your existing claim process.