What qualifies as R&D for the tax credit?
HMRC’s definition is broader than most people expect. You don’t need a lab or white coats. R&D tax credits cover any project that seeks to achieve an advance in science or technology by resolving uncertainty that a competent professional in the field couldn’t easily work out.
In practice, qualifying research and development work includes:
- Developing new software, apps, or algorithms
- Creating or improving physical products or materials
- Designing new manufacturing processes or tools
- Overcoming technical challenges in construction or engineering
- Adapting existing technology to solve a new problem
The project doesn’t have to succeed. If you tried something technically difficult and it didn’t work, the costs still qualify. HMRC cares about the attempt to advance, not the outcome.
How much can you claim?
Since April 2024, most UK companies claim under the merged RDEC scheme. This gives you a taxable credit of 20% on qualifying R&D spend. For a company spending 100,000 on qualifying R&D, that’s a 20,000 credit before tax – roughly 15,000 after corporation tax.
R&D intensive SMEs (where qualifying R&D spend is 30% or more of total costs) get a higher rate under the enhanced RDEC scheme. Loss-making intensive SMEs can claim a payable credit of up to 27%.
Qualifying costs include staff salaries, subcontractor fees (at 65%), software, consumable materials, and utilities directly relating to the R&D work. You can’t claim for land, patents, or capital equipment – but you can claim the running costs of equipment used in R&D.
How to record R&D tax credits in your accounts
This is where Xero integration helps. We set up tracking categories or specific account codes in your Xero chart of accounts to tag R&D costs as you go. That means when it’s time to claim, the data is already separated – no digging through a year of transactions trying to work out what counts.
In your statutory accounts, R&D tax credits are normally shown as either a reduction in your tax charge (if you use it against corporation tax) or as “other income” (if claimed as a cash credit). We handle the accounting treatment and make sure your Xero records match what goes into the CT600.
How we handle your R&D claim
- Identify qualifying work – We review your projects with you and work out what counts as R&D under HMRC’s guidelines. Many businesses miss qualifying work because they think it’s “just what we do”.
- Calculate qualifying costs – Using your Xero accounting data, we pull out the staff costs, subcontractor fees, materials, and software that relate to R&D projects.
- Prepare the technical narrative – HMRC wants a written explanation of the scientific or technological advance you sought and the uncertainties you faced. We draft this with you.
- File the claim – The R&D claim goes into your CT600 corporation tax return. We submit to HMRC and chase up any delays in processing.
- Get the money – If you’re profitable, the credit reduces your tax bill. If you’re loss-making, HMRC pays the credit to you in cash – usually within 4-8 weeks of filing.
Can I claim R&D tax credits?
You can claim if your company is UK-registered and pays corporation tax (or would, if it were profitable). Sole traders and partnerships can’t claim – it’s for limited companies only. There’s no minimum size – even a one-person company doing genuine R&D qualifies.
You can claim for the current accounting period and up to two previous years. So if you’ve never claimed before, there could be two years of backdated credits waiting.
Why use an accountant for R&D claims?
You can submit an R&D claim yourself, but the risk is getting the technical narrative wrong or missing qualifying costs. HMRC has increased compliance activity around R&D claims since 2023 – more enquiries, more rejections. An accountant experienced in research and development tax knows what HMRC expects and how to present the claim properly.
We integrate your Xero accounting data with the claim process so nothing falls through the cracks. And because we’re your accountant year-round (not just at claim time), we can tag R&D costs in Xero as they happen rather than reconstructing everything at year-end.
Get started
Call us on 0161 832 4451 or book a free consultation. We’ll review your projects, tell you whether they qualify, and give you an estimate of what you could claim back from HMRC.
Related guides and services
Read more from our Xero experts:
