How HMRC assesses R&D tax credit claims from UK small companies

What to take away

• R&D tax credits for UK small companies now sit inside the merged R&D expenditure credit, which replaced the old SME and RDEC schemes for accounting periods starting on or after 1 April 2024.
• Loss-making R&D-intensive SMEs can still claim enhanced support, but only with an intensity threshold of 30% R&D spend against total expenditure and a valid additional information form.
• You must notify HMRC before you claim, using the advance notification route, unless you claimed in one of the previous three years.
• HMRC compliance teams look at project records, staff time apportionment, technical narrative and the link between the two.
• Most small companies fall short because their evidence is written after the claim, not during the project.

How the merged R&D expenditure credit changed claims for small companies

The merged R&D expenditure credit, often shortened to the merged scheme, is the single Corporation Tax relief for most company R&D claims from accounting periods beginning on or after 1 April 2024. It replaced the old SME scheme and the large-company RDEC.

For small companies, the practical effect is that the claim is no longer a super-deduction against profits. It is a taxable credit above the line.

The merged scheme pays a credit of 20% of qualifying R&D expenditure, before tax. That credit is taxable, so the net benefit depends on your Corporation Tax rate. A profitable small company paying the 19% small profits rate keeps roughly 15.8p per pound of qualifying spend after tax.

A loss-making company can surrender the credit for a payable tax credit, but the rate is lower than the old SME payable credit.

The claim process itself is similar to before. You identify qualifying projects, apportion costs, and submit the figures with your Company Tax Return. The way the R&D tax relief claim process works for UK companies including small companies is set out in the official guidance.

Small companies that used to rely on the SME scheme need to model the change. A company with a large R&D spend and profits above the small profits threshold may find the merged credit less generous than the old enhanced deduction.

A loss-making company may find the payable credit smaller. Run both figures before you assume the old outcome.

The merged scheme also removed the old SME cap on the amount of R&D expenditure that could be claimed. That matters for R&D-intensive SMEs, which often spend a high proportion of turnover on development. The cap removal helps, but the intensity test for enhanced support still applies to a specific group.

If you also receive grant funding, the treatment of that funding changes under the merged scheme. Grants are no longer deducted from the R&D expenditure before the credit is calculated in the same way. Instead, the grant is taxable income and the R&D costs remain in the claim.

That interaction catches many small companies out, and it is worth checking against the rules that can catch a small business grant, from subsidy control to advertising.

Enhanced support for R&D-intensive SMEs and the additional information form

The merged scheme is not the only route. An R&D-intensive SME can claim enhanced support, which pays a higher rate on qualifying R&D expenditure. To qualify, the company must meet two tests. It must be an SME under the usual size rules, and it must meet the R&D intensity threshold.

The intensity threshold is 30% for expenditure incurred on or after 1 April 2024. That means R&D expenditure must be at least 30% of total expenditure in the relevant period. Total expenditure includes all costs, not just the R&D project costs.

A company with 40% of its spend on R&D passes. A company with 25% does not, even if the absolute R&D spend is large.

The enhanced support pays a higher payable credit for loss-making companies. The exact rate depends on the period and the company's circumstances, so check the current figures rather than relying on old SME rates. The benefit is aimed at companies that are genuinely R&D-intensive, not companies that do a small amount of development alongside other trading.

The additional information form is mandatory for most claims. It must be submitted digitally, and it must be filed before or at the same time as the Company Tax Return.

The form asks for the company's unique taxpayer reference, the accounting period, the amount claimed, and details of the projects. It also asks for the names of the people who worked on the R&D and the costs claimed.

A claim without a valid additional information form is invalid. HMRC can remove the R&D relief from the return and issue a correction. That is the single most common administrative failure for small companies. The form is not a summary of the technical narrative. It is a separate filing, and the figures must match the return.

The additional information form also asks whether the company has received any grant or subsidy for the R&D. If you have, you must say so. The interaction between grants and R&D relief is a frequent compliance point, and it is easier to handle if your planning record already tracks the funding, from eligibility to claims.

What HMRC compliance teams ask for: project records, staff time and technical narrative

HMRC compliance checks are not random audits of every claim. They are targeted at claims that show risk indicators, such as a large credit relative to turnover, vague project descriptions, or costs that do not match the company's accounts. When HMRC opens a check, it asks for evidence that supports the claim in the return.

The first thing HMRC asks for is project records. These are the documents that show what the company did, when it did it, and why it was uncertain. Good records include project plans, design documents, test results, meeting notes, and correspondence about technical problems. They do not need to be formal, but they must be contemporaneous.

The second thing is staff time records. HMRC wants to see how you worked out the proportion of each person's time spent on R&D. Timesheets are ideal.

If you do not have timesheets, you need another method that is consistent and documented, such as project diaries or a reasonable estimate supported by evidence. A round percentage with no supporting record is weak.

The third thing is the technical narrative. This is the written explanation of the scientific or technological uncertainty, the work done to resolve it, and how the company advanced the field. HMRC reads this closely.

A narrative that describes routine software development or ordinary business improvement will not support a claim. The narrative must address the uncertainty and the steps taken.

HMRC also asks for the link between the technical narrative and the costs. If the narrative describes a project that ran for six months, but the staff time claim covers twelve months, HMRC will ask why. The figures in the additional information form, the accounts, and the narrative must tell the same story.

If HMRC contacts you about a compliance check, you have the right to representation. You can ask your accountant or tax adviser to handle the correspondence. The official guidance on how to get help if HMRC contacts you explains the process and the options for responding.

HMRC's own assessment and compliance process is set out in detail in the Tax Agent's Handbook. That handbook is written for agents, but it is public, and it shows how HMRC frames its questions and what it expects from a competent claim. Reading it before you file is a sensible check on your own evidence.

Notifying HMRC before you claim: the advance notification requirement

Advance notification to HMRC is a separate requirement from the claim itself. It applies to companies that have not claimed R&D relief in the previous three years. If you are a first-time claimant, or you have had a gap of three years or more, you must tell HMRC that you intend to claim before you submit the return.

The notification must be made within six months of the end of the accounting period in which the R&D took place. It must be submitted digitally, and it must include the company's details, the accounting period, and a description of the R&D. HMRC will acknowledge the notification and may ask for more information.

If you do not notify, the claim is invalid. HMRC can refuse the relief even if the R&D is genuine and the additional information form is filed. The notification is not a claim. It is a signal that a claim is coming.

The official guidance on how to notify HMRC before claiming R&D relief sets out the exact steps and deadlines.

The notification requirement catches companies that change their year end or that claim for the first time after a period of no claims. It also catches companies that have claimed through a different entity. If you are unsure whether you have claimed in the previous three years, check your Corporation Tax returns rather than relying on memory.

A practical approach is to build the notification into your project planning. When you start an R&D project, note the accounting period it falls into and diarise the notification deadline. That way you do not discover the requirement after the return is due.

The same discipline helps with grant projects, where quality gates between application and close-out keep the evidence in order.

Accounting periods, trading losses and how R&D credits interact with Corporation Tax

R&D relief is claimed through the Company Tax Return, so the accounting period drives everything. The merged credit is calculated for the accounting period, and the additional information form must match that period. If your accounting period is longer or shorter than twelve months, you may need to apportion figures.

A company with profits can use the R&D expenditure credit to reduce its Corporation Tax bill. The credit is taxable, so it increases the profit before the credit is applied. The net effect is a reduction in tax payable, not a cash payment, unless the credit exceeds the tax due.

A loss-making company can surrender the credit for a payable tax credit. The amount payable depends on the scheme and the company's circumstances. The payable credit is capped, and the cap depends on the company's PAYE and NIC liabilities for the period. That cap is a common source of surprise for small companies with few employees.

Trading losses interact with R&D relief in ways that are easy to get wrong. If you have a trading loss, you may be able to carry it back or forward, or set it against other profits. R&D relief may reduce the loss available for other reliefs.

The official guidance on relief from Corporation Tax trading losses explains the options and the order in which reliefs apply.

A common mistake is to claim R&D relief and loss relief on the same expenditure without checking the interaction. The two reliefs can both apply, but the order matters. If you claim the R&D credit first, the loss is reduced.

If you claim loss relief first, the R&D claim may be smaller. Model both before you file.

The accounting period also affects the intensity threshold for R&D-intensive SMEs. The 30% test is applied to the expenditure of the period. A company with a short period may find the ratio changes. If you are close to the threshold, check the figures for the actual period rather than assuming the annual ratio.

Where small companies most often fall short on evidence, and how to fix it before filing

Most small companies do not fail because their R&D is not genuine. They fail because the evidence does not show what they did. The fix is to build the evidence during the project, not after the claim. The following steps set out a workable order.

1. Identify the projects and the accounting period they fall into. Write a short description of the uncertainty for each project while the work is fresh.
2. Set up a time recording method for everyone who works on R&D. Even a simple weekly note is better than a retrospective estimate.
3. Keep the technical documents in one place, with dates. Design files, test results and meeting notes all help.
4. Reconcile the R&D costs to the accounts before you file. The figures in the additional information form must match the return.
5. Check the advance notification deadline and file it if you are a first-time claimant.
6. Complete the additional information form and file it with the return.

A checklist for the evidence pack before filing:

• Project descriptions with dates and the uncertainty addressed
• Staff time records for each person claimed
• Technical narrative linking the work to the uncertainty
• Cost reconciliation to the accounts
• Additional information form completed and filed
• Advance notification filed if required
• Grant funding identified and treated correctly

If you receive grant funding for the same project, the grant must be identified in the additional information form. The treatment of the grant depends on the scheme. Some grants are taxable and some are not, and the R&D claim must reflect that.

A grant budget built around cost, eligibility, match funding and monthly cash helps you see the interaction before you file.

HMRC compliance teams also look at the competence of the person who prepared the claim. If the claim was prepared by an adviser, HMRC may ask for the adviser's details and the basis of their advice. That is not a reason to avoid advisers, but it is a reason to keep your own records.

You are responsible for the claim even if someone else prepared it.

The most common weak point is the technical narrative. A narrative that says the company developed a new app is not enough. It must say what was uncertain, why existing knowledge did not solve it, and what the company did to resolve it. If you cannot write that in plain English, the claim is not ready.

The second most common weak point is staff time. A claim that says 80% of a director's time was R&D, with no records, invites a question. A claim that says 30% of a director's time, supported by project diaries, is easier to defend. The percentage matters less than the evidence behind it.

The third weak point is the link between the claim and the accounts. If the R&D costs in the claim do not appear in the accounts, HMRC will ask why. The answer may be that the costs are in a different line, but you need to show the reconciliation.

A simple spreadsheet that maps the claim to the accounts is enough.

Finally, keep the evidence after the claim is filed. HMRC can open a compliance check up to six years after the end of the accounting period. If you cannot produce the records, the claim is at risk. Store the evidence pack with the Corporation Tax records, and keep it for the full retention period.

Common questions

Do small companies still claim under the old SME scheme? No. The old SME scheme and RDEC were merged into the R&D expenditure credit for accounting periods beginning on or after 1 April 2024. Some companies with periods straddling the change may have transitional rules, so check the period.

What is the intensity threshold for R&D-intensive SME support? The threshold is 30% of total expenditure spent on R&D for expenditure incurred on or after 1 April 2024. The test uses total expenditure, not turnover.

Is the additional information form always required? It is required for most claims, and a claim without it is invalid. It must be filed digitally before or at the same time as the Company Tax Return.

When must I notify HMRC before claiming? If you have not claimed in the previous three years, you must notify HMRC within six months of the end of the accounting period in which the R&D took place.

What happens if HMRC opens a compliance check? HMRC will ask for project records, staff time evidence and the technical narrative. You can appoint an adviser to handle the correspondence, and the Tax Agent's Handbook shows the process.

Can I claim R&D relief if I received a grant? Yes, but the grant must be identified in the additional information form, and the treatment depends on the scheme. The grant may be taxable income, and the R&D costs may still qualify.