How R&D tax relief works for UK startups

This guide explains what counts as R&D for tax, how the two claim routes are worked out and paid, which costs qualify, and the forms, deadlines and HMRC checks that come with a claim.
By Buzz Accounting · Updated 16 September 2026

What R&D tax relief is

R&D tax relief is a corporation tax relief for companies that spend money on projects seeking an advance in science or technology. Companies claim it in their Company Tax Return, and a company that is making a loss can receive it as a cash payment from HMRC.

For accounting periods beginning on or after 1 April 2024 there are two routes. Most companies claim under the merged scheme, which gives a taxable credit worth 20% of qualifying costs. A small or medium-sized company that makes a loss and spends at least 30% of its total costs on R&D can choose enhanced R&D intensive support instead, which pays more when the loss is large enough.

Both routes use the same list of qualifying costs, and both cap the payable credit by reference to the company's PAYE and National Insurance. A company claiming for the first time must tell HMRC that it intends to claim within six months of the end of its period of account, and every claim needs an additional information form sent no later than the tax return. If a required notification or the additional information form is missing, the claim is invalid. This guide takes each rule in turn, with a worked example comparing the two routes for a loss-making company.

What this guide covers

What counts as R&D for tax, with software examples
The merged scheme credit and enhanced support compared
Qualifying costs, work done abroad and the PAYE cap
Claim notification, the additional information form and HMRC checks

What counts as R&D for tax

Under the government's guidelines on the meaning of R&D for tax purposes, R&D takes place when a project seeks an advance in science or technology. The R&D is the work that directly helps to resolve scientific or technological uncertainty.

The advance has to be in overall knowledge or capability in the field. Work that is new only to your company, or that catches up with what is already publicly known, does not qualify. A project still counts if it fails, or if a competitor has achieved the same result and kept the method secret.

Uncertainty exists when a competent professional working in the field cannot readily work out whether something is possible or how to achieve it. Routine problem-solving, optimisation and fine-tuning do not count. The R&D runs from the start of work on the uncertainty until it is resolved or the work stops.

Since April 2023 mathematical advances count as science, while the arts, humanities and social sciences, including economics, are excluded. Some supporting work inside a project also counts, such as writing up findings and maintaining equipment used for the R&D, while market research, fundraising and commercial planning are excluded.

Software projects

Software is judged by the same test, and HMRC's software guidance looks for an advance in the underlying technology. Its examples of work that can involve technological uncertainty include:

building data architectures that go beyond what readily available database engines can do
extending software frameworks or libraries beyond their original design, where the knowledge needed was not readily available
combining systems where a competent professional could not readily work out how the parts should fit together
implementing a new algorithm that significantly increases capability in the field

Configuring existing software, assembling components in an established pattern, gathering business requirements, testing look and feel, deployment and routine bug fixing usually fall outside the R&D. HMRC notes that most commercial software projects do not qualify in their entirety, so a claim has to identify the parts that do.

The merged scheme credit

The merged scheme covers accounting periods beginning on or after 1 April 2024 and is open to trading companies of any size that are chargeable to corporation tax. The credit is 20% of qualifying costs.

How the credit is taxed and paid

The credit is taxable trading income, and HMRC applies it through a set of payment steps:

The credit pays the company's corporation tax for the period.
What is left is reduced by notional tax at 25% if profits before the credit are taxed at the main rate, including under marginal relief, or 19% otherwise, including for loss-making companies. The amount taken off is carried forward against future corporation tax.
Any amount above the PAYE cap is carried forward as credit for the next period.
The remainder pays other amounts owed to HMRC, such as corporation tax for other periods or VAT, or can go to a group company.
Anything still left is paid to the company.

In effect a company paying the main rate keeps 15p for each £1 of qualifying costs, and a loss-making company is paid 16.2p. HMRC does not have to pay while PAYE or National Insurance for the period is unpaid, and nothing is paid unless the company is a going concern, meaning its latest published accounts were prepared on that basis without relying on the R&D credit and it is not in liquidation or administration.

Enhanced support for loss-making R&D-intensive companies

Enhanced R&D intensive support is an optional route for small and medium-sized enterprises, which for R&D means fewer than 500 staff and either turnover up to €100 million or a balance sheet up to €86 million, counting linked and partner businesses.

The company must make a trading loss for tax before the extra deduction described below, and its R&D spending must be at least 30% of its total relevant expenditure. Total relevant expenditure is broadly the costs in the profit and loss account, adding in the costs of connected companies and leaving out payments between them. A company below 30% can still use the route if it met the test, and claimed SME relief or enhanced support, for its last 12-month accounting period.

The company deducts an extra 86% of its qualifying costs, 186% in total, which increases its trading loss. It can then surrender the lower of that loss and 186% of its qualifying costs for a payable credit of 14.5% of the loss surrendered, and the credit is not taxed. The most the credit can be worth is 26.97p for each £1 of qualifying costs, reached when the loss before the extra deduction is at least equal to the qualifying costs. A company that qualifies can choose the merged scheme instead, but it cannot claim under both routes for the same costs.

Which costs qualify

Under both routes, only these categories of cost count, and only the share of each that relates to the R&D:

Staff. Salaries, wages, bonuses, employer pension contributions and employer National Insurance for directors and employees working on the R&D, in proportion to their time on it.
Externally provided workers. Workers supplied by an agency or staff provider, at 65% of the payment if the provider is unconnected, or the lower of the payment and the provider's own costs if it is connected.
Contracted-out R&D. Payments to another company or person to carry out part of your R&D, on the same 65% or connected basis.
Consumables. Materials, water, fuel and power used up or transformed in the R&D, unless they end up in products you sell.
Software. Licence fees for software used in the R&D, apportioned if it is also used for other work.
Data licences and cloud computing. Data licences and cloud services, such as data storage, hardware facilities, operating systems and software platforms, used directly in the R&D. Use in supporting activities does not count.
Clinical trial volunteers. Payments to the subjects of clinical trials.

Rent, rates, capital expenditure, land, patents and trade marks do not qualify. A cost must also have been paid before the claim is made.

R&D you pay someone else to do

Only the company that decides the R&D should be done can claim it, so if you contract out part of your own project you claim the payment, provided you can show that your company decided on and planned the work. If a customer contracts R&D out to your company, the customer normally claims it, although you can claim R&D you chose to do while delivering a contract that did not call for it. HMRC's guidance on contracted-out R&D looks at the contract and at circumstances such as who owns the intellectual property and carries the financial risk.

Work done outside the UK

Payments to contractors for R&D carried out abroad, and to staff providers for workers whose pay is not subject to UK PAYE and National Insurance, are excluded. The exception is R&D that needs conditions which are absent from the UK and wholly unreasonable to replicate here, such as geography, environment, access to clinical trial participants or legal and regulatory requirements. The cost of the work and the availability of workers do not count as conditions. It does not apply to your own employees' staff costs, or to enhanced support claims by companies registered in Northern Ireland that have not opted out.

The PAYE and National Insurance cap

Under both routes, the credit for a period is capped at £20,000 plus 300% of the company's PAYE income tax and Class 1 National Insurance liabilities for the period, with the £20,000 reduced for a period shorter than 12 months. Under the merged scheme, credit above the cap is carried forward to the next period. Under enhanced support, the company surrenders only enough loss to produce a credit equal to the cap and carries the rest of the loss forward.

The cap counts the company's own payroll taxes and those of connected companies that supply it with workers or R&D, so a team made up mainly of unconnected contractors can reach it quickly. A company is exempt from the cap if its own employees do all or most of the work of creating intellectual property, or of managing intellectual property it owns, and no more than 15% of its qualifying costs are paid to connected subcontractors and staff providers.

Worked example comparing the two routes

The figures are illustrative. A software company with no connected companies and a 12-month accounting period beginning after 1 April 2024 has income of £350,000, costs of £800,000 and a trading loss for tax of £450,000 before any R&D claim. Its PAYE and National Insurance liabilities for the year are £120,000. Its qualifying costs are:

staff time on the R&D, £230,000
agency engineers, £40,000 paid, of which 65% counts, £26,000
cloud computing and data licences used in the R&D, £38,000
software licences used in the R&D, £6,000

That makes £300,000 of qualifying costs, which is 37.5% of the £800,000 of total costs, so the company passes the 30% test. The PAYE cap is £20,000 plus 300% of £120,000, which is £380,000, so it does not limit either route.

Under the merged scheme

The credit is 20% of £300,000, which is £60,000. As taxable income it cuts the trading loss from £450,000 to £390,000. With no corporation tax to pay, notional tax at 19% takes £11,400 off the credit and carries it forward against future corporation tax, and the company is paid £60,000 minus £11,400, which is £48,600.

Under enhanced support

The extra deduction is 86% of £300,000, which is £258,000, so the loss rises from £450,000 to £708,000. The company can surrender the lower of that loss and 186% of £300,000, which is £558,000. The credit is 14.5% of £558,000, which is £80,910, and £708,000 minus £558,000 leaves £150,000 of loss to carry forward.

Comparing the results

Enhanced support pays £80,910 minus £48,600, which is £32,310 more in cash now. The merged scheme leaves £240,000 more loss to carry forward, plus the £11,400 held against future tax. That extra loss would save £45,600 of corporation tax against profits taxed at 19%, or £60,000 at the 25% main rate, but only once the company makes enough profit to use it. At these rates, and before any cap, enhanced support pays more cash in the year whenever the loss before the extra deduction is at least about 26% of qualifying costs. Our R&D tax relief calculator runs the same sums on your own figures.

Claim notification for first-time claimants

A company must send HMRC a claim notification if it is claiming for the first time, or if its last claim was made more than three years before the end of the notification period. If a required notification is not sent in time, the claim is invalid.

The notification period runs from the first day of the period of account to six months after it ends. For a company whose period of account ended on 31 March 2026, the last day is 30 September 2026. The short online form asks for the company's tax reference, the senior person responsible, any agents, the period dates and an overview of the planned R&D projects.

The additional information form

Every claim needs an additional information form for each accounting period, sent before or on the same day as the Company Tax Return. If both go on the same day, the form must go first, and if the return arrives first, HMRC removes the claim from it. The form asks for:

the company's tax, PAYE and VAT references and industry code, with contact details for the senior person responsible and every agent involved
qualifying costs by category, answers about the PAYE cap and, for enhanced support, the figures for the 30% test
for each project described, the field of science or technology, the knowledge at the start, the advance sought, the uncertainties and how the work tried to resolve them

A company with one to three projects describes all of them. With more, it describes at least three that cover at least half the qualifying costs, or the ten largest if covering half would take more than ten.

The deadline for making a claim

A claim is made in the Company Tax Return or an amended return, with the credit worked out, the supplementary page CT600L and bank details for the payment. It must be made within two years beginning with the last day of the period of account, or within 42 months beginning with the first day where the period of account is longer than 18 months. HMRC can accept a later claim only at its discretion.

What HMRC checks and how enquiries work

For a company that is not in a group and files on time, HMRC has 12 months from receiving the return to open an enquiry, whether or not it has paid the credit.

In an enquiry, HMRC asks the company to explain in plain language the advance it was seeking, the uncertainties, why a competent professional could not readily resolve them and when they were overcome. It may ask to speak to the people who did the work, see project documents, test results and expense records, visit the site or examine prototypes. HMRC recommends keeping a competent professional's written opinion on the advance and uncertainties, the method used to work out costs, and the project's own records.

HMRC does not have to pay the credit while an enquiry is open, although it can make a provisional payment. If the company and HMRC cannot agree, HMRC closes the enquiry and amends the return, and the company can appeal. If an enhanced support claim is removed because its conditions were not met, the company has 30 days from the closure notice, or from the end of any appeal, to claim under the merged scheme instead. HMRC can charge interest on overpaid credit, and a penalty if the company did not take reasonable care. We prepare claims for a fixed fee that includes handling any HMRC enquiry, as set out on our R&D tax relief page.

Get the next guide by email

Leave your name and email address and we will send you the next guide when it is published, with tax tips for startups. You can unsubscribe at any time.

Common questions

Can a loss-making startup get R&D tax relief in cash?

A loss-making company can have its R&D relief paid in cash under either route. Under the merged scheme, the 20% credit is reduced by notional tax at 19%, so the company receives 16.2p for each £1 of qualifying costs and carries the rest forward against future corporation tax. A small or medium-sized company whose R&D is at least 30% of its total costs can choose enhanced support, worth up to 26.97p for each £1 when the loss is large enough. Both payments are limited by the PAYE cap, need the company to be a going concern and can be held back while HMRC has an enquiry open.

Does building a software product count as R&D?

Only the parts of the work that seek an advance in computing by resolving technological uncertainty count as R&D. HMRC's software guidance gives examples such as data architectures that go beyond readily available database engines, extending frameworks beyond their design and new algorithms that significantly increase capability. Configuring existing tools, assembling components in an established pattern, interface styling, deployment and routine bug fixing do not count. HMRC notes that most commercial software projects do not qualify in their entirety, so the claim has to separate the qualifying work from the rest, usually with the help of the technical lead.

Can we claim for contractors and agency workers?

You can usually claim 65% of what you pay unconnected contractors and agencies for R&D work, subject to three rules. For contracted-out R&D, your company must be the one that decided on and planned the work. For agency workers, only pay that is subject to UK PAYE and National Insurance counts. Work done abroad is excluded unless it needs conditions that are not present in the UK and would be wholly unreasonable to replicate, and cost or a shortage of staff does not meet that test. Unconnected contractors' payroll taxes also do not count towards the PAYE cap, so a contractor-heavy team can hit the cap.

What happens if we miss the claim notification deadline?

If the company needed to notify and did not do so within six months of the end of the period of account, it cannot make a claim for that period. The rules only allow a claim after the notification period where an earlier claim within three years, a notification, or a claim or notification for another accounting period in the same period of account covers it. The company can still notify on time for its next period. A notification can be sent at any point from the first day of the period of account, so it can go in early in any year you expect to claim for.

Does advance assurance replace the claim notification?

Advance assurance does not replace the claim notification or the additional information form. HMRC's full claim advance assurance is for SMEs making their first claim with turnover below £2 million and fewer than 50 employees, and if HMRC agrees it covers the first three accounting periods. HMRC's guidance says the normal steps for claiming still apply to a company that has advance assurance, including a notification where one is needed. HMRC is also running a targeted advance assurance pilot until May 2027, which gives assurance on up to two specific areas of a claim.

How long does HMRC take to pay an R&D credit?

HMRC's practice note says it aims to pay 85% of payable R&D credits, or to contact the company about the claim, within 40 days. Where it decides not to pay because it thinks the claim may be wrong, it aims to open an enquiry within 60 days of receiving the claim. HMRC does not have to pay while an enquiry is open, though it can make a provisional payment, and it can still open an enquiry within its normal time limit after paying. It also does not have to pay while PAYE or National Insurance for the period is unpaid.