How R&D tax credits are calculated

What are R&D tax credits?

R&D tax credits is the everyday name for the Corporation Tax support available to companies that carry out qualifying research and development. Which scheme applies depends on when the company's accounting period began.

For accounting periods beginning on or after 1 April 2024, two schemes replace the old RDEC and SME schemes: the merged R&D expenditure credit (RDEC) scheme, and enhanced R&D intensive support (ERIS). The rules on qualifying expenditure are the same for both. The way the credit is worked out is different. A company can be eligible for ERIS and still choose the merged scheme, but it cannot claim under both for the same expenditure. ^[1]

Earlier periods fall under the old RDEC and SME schemes. This guide covers the two current schemes only. ^[4]

How is the merged RDEC credit calculated?

HMRC's manual sets out the steps. The company's qualifying expenditure for the period is multiplied by the RDEC rate, which is 20% for non ring-fenced trades and 49% for ring-fenced trades. The result is the gross credit. The company does not have to claim the maximum available. ^[2]

For illustration only, qualifying expenditure of £100,000 at the 20% rate gives a gross credit of £20,000 before tax and before the payment steps below. ^[2]

The gross credit is accounted for as trading income in the period of the claim, either in the accounts or in the tax computations. ^[2]

How does enhanced R&D intensive support work?

ERIS is for loss-making R&D intensive SMEs. A company claiming it can deduct an extra 86% of its qualifying costs when working out its adjusted trading loss, on top of the deduction already in the accounts, making a total deduction of 186%. It can also claim a payable tax credit, which is not liable to tax and is worth up to 14.5% of the surrenderable loss. ^[1]

To use ERIS, a company must meet three conditions. It must be an SME, it must make a trading loss for tax purposes before the extra deduction, and it must meet the intensity condition. That condition requires relevant R&D expenditure of at least 30% of total expenditure, including that of connected companies. ^[1]

A profit-making SME, or one that is not R&D intensive, can claim under the merged scheme instead. ^[1]

Which costs count towards the calculation?

The rate is applied to qualifying expenditure, not to everything the company spends. HMRC's cost guidance says a cost must have been paid before the claim is made, and it must fall between the start and end of the project. Costs that may qualify include: ^[3]

• staff costs for time spent on the project, including salaries, bonuses, pension contributions and employer Class 1 National Insurance, in proportion to the time worked on R&D
• consumable items used up in the R&D, such as materials, fuel, power and water
• software licence fees, and a reasonable share of software used partly for R&D
• data licence and cloud computing costs, for accounting periods beginning on or after 1 April 2023 ^[3]
• some payments to contractors and to staff providers, with different rules for connected and unconnected providers and for work done overseas

The guidance sets conditions for each of these, so a cost that looks like R&D spend may still be excluded. ^[3]

Is an R&D tax credit taxable?

The merged RDEC credit is taxable. It is classed as trading income and is liable to Corporation Tax. ^[1] The ERIS payable credit is not liable to tax. ^[1]

The Corporation Tax rate depends on profits. For the year starting 1 April 2026 the small profits rate is 19% for profits under £50,000 and the main rate is 25% for profits over £250,000, with marginal relief in between. ^[5] HMRC's manual also notes that a lower rate of notional tax applies at step 2 of the payment steps for small profit-makers and loss-makers. ^[6]

What are the payment steps and the PAYE cap?

Under the merged scheme the credit is not simply paid out. HMRC's guidance sets out seven steps. The credit is used first against the company's Corporation Tax for the period, then compared with the net amount claimed and with PAYE and National Insurance or the PAYE cap. Any credit left can be used against Corporation Tax for earlier periods, other group members' Corporation Tax and other liabilities to HMRC. What remains is paid to the company if the going concern conditions are met. ^[4]

The credit received in a period cannot exceed the PAYE cap unless the company is exempt. The cap is £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities for the period. Under the merged scheme, any excess is carried forward to the next accounting period. ^[1]

How are the credits shown in the accounts?

For the merged scheme, the guidance says to show the expenditure credit as taxable income in the profit and loss account, or add it to profit in the tax computations. For ERIS, the additional deduction goes into the calculation of the adjusted trading profit or loss. ^[4]

What are the requirements to claim?

A company claiming under the merged scheme must be trading, chargeable to Corporation Tax and have a project that meets the definition of R&D. ^[1] The claim is made on the Company Tax Return, with the supplementary form CT600L, and the company must have submitted a claim notification form and an additional information form where they apply. ^[4]

Because the credit depends on the company's tax position, a worked figure for one business says little about another. A specialist adviser can work through the calculation with the company's own numbers. To check the figures for your own business, an R&D tax credits review could identify whether you may be entitled to a credit.