Understanding R&D Tax Credits: Are You Eligible?

In today’s competitive landscape, innovation is key to staying ahead. For many small and medium-sized UK businesses, Research and Development (R&D) tax credits represent one of the most valuable government incentives available. These reliefs can return a significant portion of your qualifying expenditure as a tax reduction or cash payment, helping you reinvest in growth, new products, or improved processes. 

At Jan McDermott Chartered Accountants in Wirral, we specialise in helping owner-managed businesses claim R&D tax relief correctly and maximise their entitlements. With our proactive, client-focused approach and expertise in Xero for real-time financial visibility, we guide companies through the complexities so you can focus on what you do best – innovating and growing. 

This guide explains how R&D tax credits work in 2026, who qualifies, what activities and costs count, and the steps to make a successful claim. Whether you’re a software developer, manufacturer, engineer, or run a tech-enabled service, you might be surprised at what qualifies. 

What Are R&D Tax Credits?

R&D tax relief is a Corporation Tax incentive designed to encourage UK companies to invest in innovation. It rewards businesses that undertake projects seeking to advance science or technology by overcoming scientific or technological uncertainties. 

Since 1 April 2024, the previously separate SME and RDEC schemes have largely merged into a single Research and Development Expenditure Credit (merged RDEC) scheme. This simplification aims to make the system fairer and more consistent while tightening compliance to reduce error and fraud. 

• Merged RDEC scheme: Available to all companies (regardless of size) for accounting periods beginning on or after 1 April 2024. It provides a 20% above-the-line taxable credit on qualifying R&D expenditure. 
• For a profitable company paying 25% Corporation Tax, the net benefit is approximately 15% of qualifying spend. 
• Loss-making companies can receive a payable cash credit (net benefit around 16.2% depending on circumstances). 
• Enhanced R&D Intensive Support (ERIS): This targeted scheme offers higher relief for loss-making R&D-intensive SMEs. If at least 30% of your total expenditure relates to qualifying R&D, you may qualify for enhanced support worth up to 27% of qualifying R&D spend as a payable credit. 

These rates make R&D investment far more attractive, especially for growing businesses in Wirral, Merseyside, and across the UK. 

Who Is Eligible?

To claim R&D tax relief, your company must meet these core requirements: 

1. Be a UK company liable to Corporation Tax (sole traders and partnerships generally cannot claim directly, though certain structures may allow indirect benefits). 
2. Have carried out qualifying R&D activities in the accounting period. 
3. Incur qualifying R&D expenditure. 

Company size definitions (based on staff headcount, turnover, and balance sheet totals):

• SME: Fewer than 500 employees and either turnover ≤ €100m or balance sheet total ≤ €86m. 
• Larger companies fall under the merged scheme automatically. 

Even if you’re an SME, you claim under the merged RDEC unless you meet the strict R&D-intensive criteria for ERIS. 

Important note on timing: The merged scheme and ERIS apply to accounting periods starting on or after 1 April 2024. If your year-end is 31 March 2025 or later, you’re likely already operating under these rules.

What Counts as Qualifying R&D?

HMRC’s definition is specific: Your project must seek an advance in science or technology by resolving scientific or technological uncertainty that a competent professional in the field could not readily solve.

It’s not enough to develop a new product or improve efficiency for commercial reasons alone. The uncertainty must relate to science or technology itself. 

Qualifying activities typically include:

• Developing new or substantially improved products, processes, materials, or software. 
• Experimentation, prototyping, testing, and iterative design to overcome technical challenges. 
• Adapting existing technology in a novel way where the outcome is uncertain. 
• Work on data analytics algorithms, AI systems, or complex software integrations that push technological boundaries. 

Common sectors and examples:

• Software & IT: Creating novel algorithms, improving machine learning models, or developing secure systems where integration challenges create genuine uncertainty.
• Manufacturing & Engineering: Designing new machinery, improving production processes, developing advanced materials, or solving manufacturing tolerances that experts cannot easily resolve.
• Construction & Architecture: Innovative building techniques, sustainable materials, or structural solutions involving technological uncertainty.
• Life Sciences & Agri-tech: Developing new formulations, improving crop yields through technology, or creating diagnostic tools.
• Clean tech & Energy: Projects advancing renewable energy efficiency or storage solutions.

What does NOT usually qualify:

• Routine product development or customisation without technological uncertainty. 
• Aesthetic or stylistic changes. 
• Market research, pure commercial trials, or work in social sciences/arts. 
• Standard application of existing technology without advancement. 

A “competent professional” test applies, someone with relevant expertise should confirm the uncertainty existed. 

What Expenditure Can You Claim?

Only costs directly attributable to qualifying R&D count. Eligible categories include: 

• Staff costs: Salaries, employer National Insurance and pension contributions for employees directly involved in R&D (including supervisory and support staff where appropriate).
• Externally provided workers (EPWs): Payments to agencies for temporary staff working on your R&D (usually up to 65%).
• Subcontractors: Payments to UK subcontractors (restrictions apply; generally claimable at 65% under the merged scheme, with the claimant needing to demonstrate they initiated the R&D).
• Consumable items: Materials or items that are transformed, consumed, or wasted during the R&D process.
• Software licences: Costs of software used directly and exclusively for the R&D project.
• Certain data/cloud costs and other direct expenses.

Key restrictions in 2026:

• Overseas subcontractor and EPW costs are heavily restricted unless specific exceptions apply (e.g., geographical or regulatory necessity). Focus on UK-based R&D where possible.
• Capital expenditure is generally excluded (though capital allowances may apply separately).

Accurate record-keeping is essential. We recommend using Xero to tag and track R&D-related costs in real time, making year-end claims far smoother.

Recent Changes and Compliance Requirements

HMRC has strengthened compliance to protect the integrity of the scheme:

• Additional Information Form (AIF): Mandatory for most claims, providing detailed project descriptions, uncertainties, and costs.
• Pre-claim notification: Required for first-time claimants (or those not claiming in the previous three periods) within six months of the accounting period end.
• Stricter rules on contracted-out R&D: The company initiating and bearing the risk of the project usually claims.
• Increased scrutiny on claims, with HMRC focusing on genuine innovation rather than routine work.

Claims must normally be made within two years of the end of the accounting period. Late claims are rarely accepted.

How Much Could You Claim?

Examples (approximate, based on current rates): 

• A profitable manufacturing company spending £100,000 on qualifying R&D under the merged scheme might receive a £20,000 taxable credit, delivering a net benefit of around £15,000 after Corporation Tax. 
• A loss-making R&D-intensive software startup could see up to £27,000 back in cash under ERIS. 

Even modest R&D spend can generate meaningful refunds or reductions enough to fund the next phase of development. 

Steps to Make a Successful R&D Claim

1. Identify qualifying projects: Review your activities with a competent professional. Document the uncertainty, work done, and advance sought.
2. Calculate qualifying expenditure: Use robust records to apportion staff time, materials, and other costs.
3. Choose the correct scheme: Merged RDEC for most; check ERIS eligibility if loss-making and R&D-intensive.
4. Prepare supporting evidence: Technical reports, project plans, timesheets, and financial breakdowns.
5. Submit via your Corporation Tax return with the Additional Information Form.
6. Seek specialist advice: Errors can lead to enquiries or rejected claims.

At Jan McDermott, we handle the technical and financial aspects end-to-end. Our team works closely with clients to identify eligible projects they might have overlooked, ensuring compliance while maximising relief. 

Why Choose Jan McDermott for Your R&D Claim?

Based in Wirral and supporting businesses UK-wide, we combine deep tax expertise with practical business support. As Xero Certified Advisors, we help you maintain clean, real-time data that simplifies R&D calculations and future claims. 

We offer: 

• Free initial reviews to assess eligibility. 
• Bespoke claim preparation and submission. 
• Ongoing tax planning to integrate R&D relief with your broader strategy. 
• Support for Making Tax Digital compliance. 

Many of our clients have recovered tens of thousands in relief, freeing up cash to hire talent, invest in equipment, or accelerate growth. 

Don’t Miss Out on This Valuable Incentive

If your business undertakes any form of technical development, software creation, process improvement, or scientific advancement, you could be eligible for R&D tax credits. With the merged scheme now in place and enhanced support for intensive innovators, 2026 is an excellent time to review your activities. 

Contact Jan McDermott Chartered Accountants today for a no-obligation discussion. We’ll assess your projects, estimate potential relief, and create a clear action plan. Call us or request a free consultation. 

Your innovation deserves reward, let us help you claim it. 

This article is for general guidance only and reflects rules as of March 2026. Tax legislation can change, and individual circumstances vary. Professional advice tailored to your business is essential. Jan McDermott Chartered Accountants is regulated by the ICAEW and here to support small UK businesses with accurate, proactive R&D tax relief claims