If your business invests in innovation, you’ve likely benefited from Research & Development (R&D) tax relief. Innovation can include developing new products, processes or services, or enhancing existing ones.

The incentive of R&D tax relief can lead to a cash credit or a reduction in your Corporation Tax, providing vital support for your innovation efforts.

But from April 2025, significant changes are coming and they could impact your claims.

Understanding these reforms now will help you prepare and maximise your relief.

What qualifies for R&D tax relief?

Many small business owners assume R&D tax relief is only for high-tech labs and cutting-edge science, but that’s not the case. If your business is solving industry challenges, improving processes, or developing new products, you might qualify.

Your project could be eligible if it:

• Seeks a scientific or technological advance – Are you creating something new or enhancing existing products or services?
• Addresses uncertainty – Are you tackling a challenge without a clear solution?
• Involves experimentation – Are you testing different approaches to overcome technical issues?
• Uses skilled professionals – Are engineers, software developers, or scientists involved in your work?

If the answer is yes, you may be able to claim valuable tax relief.

How to claim R&D tax relief

The process of claiming R&D tax relief involves several key steps:

1. Identify eligible projects and costs

Qualifying costs include staff wages, subcontractor fees, software, and materials used for R&D.

2. Prepare a technical report

Clearly document your project’s objectives, the problems faced, and the innovative steps taken to solve them.

3. Submit your claim

Complete the supplementary form CT600L when preparing and submitting your company tax return (CT600), if you’re claiming a payable tax credit or R&D expenditure credit

4. Await HMRC review

If approved, your relief will be processed as a tax reduction or cash credit.

Major changes effective from April 2025

The R&D tax relief landscape is evolving. Here’s what small businesses need to be aware of.

A unified scheme: The SME and RDEC schemes will merge into one, providing a 20% “above the line” credit on qualifying R&D spend for all companies. Meaning the credit it subject to tax.

Changes to subcontracted R&D and external workers: Only UK-based R&D work will qualify, with exceptions granted if specific conditions can’t be replicated in the UK.

Enhanced support for loss-making SMEs: If R&D accounts for at least 30% of total expenditure, SMEs may qualify for a non-taxable credit of up to 14.5%.

What this means for small businesses

The changes bring both opportunities and challenges. Here’s what to consider:

• If you outsource R&D abroad, you may need to rethink your strategy – The exclusion of overseas subcontractors means businesses will need to bring more R&D work in-house or to UK-based providers to maintain eligibility.

• Budgeting may need adjustment – The shift to a unified scheme could mean changes to how much relief your company receives.

• Compliance is more important than ever – With stricter documentation requirements, detailed records of R&D activities and expenditures will be essential.

While these reforms aim to strengthen UK innovation, they may also limit international collaboration, particularly in industries reliant on niche expertise from overseas.

What should you do next?

Making your way through these changes can be complex, but preparing early will ensure you make the most of the relief available. We recommend:

• Reviewing your current R&D activities and assessing how these changes might affect your claims.

• Exploring ways to restructure R&D activities to maximise UK-based eligibility.

• Consulting a tax advisor to ensure compliance and optimise your claim.

R&D tax relief is a powerful tool for growth, and staying ahead of these changes will keep your business competitive.

If you have questions about how these reforms affect you, get in touch with our team.