Is R&D Tax Relief Still Worth It in 2026? What UK Small Businesses Need to Know

Yes, R&D tax relief is still worth claiming in 2026 for most UK businesses doing genuine R&D. The merged scheme gives a 20% taxable credit, worth around £15,000 to £16,200 net per £100,000 of qualifying spend. Loss making R&D intensive SMEs can get up to about £27,000 through ERIS. The rules are stricter than before, so strong evidence and meeting HMRC deadlines matter more than ever.

Picture a Hertfordshire based software firm that spent £100,000 on staff time building a custom inventory forecasting tool last year. The founder is right to ask whether it is still worth the paperwork. For a business doing genuine R&D, the answer is usually yes, just with more realistic expectations than before 2024.

This guide breaks down what’s changed, what the numbers actually show, how to claim, and how to work out whether your own business should bother claiming.

What is R&D Tax Relief?

R&D tax relief (sometimes called R&D tax credits) is a UK government incentive that reduces a company’s Corporation Tax bill, or pays out a cash credit, based on money spent developing new or improved products, processes, software or materials. It exists to reward companies that take on genuine technical risk, meaning work where the outcome isn’t obvious to a competent professional in the field, not routine improvements or off-the-shelf implementation.

Qualifying costs typically include:

• Staff costs for employees directly working on the R&D project, including employer National Insurance and pension contributions
• Subcontractor and externally provided worker costs (subject to restrictions)
• Software and consumable items used up in the R&D process
• Cloud computing and data costs used directly in the R&D
• A proportion of utility costs tied to the R&D activity

Crucially, a project doesn’t need to succeed to qualify. HMRC’s own guidance is explicit that failed or abandoned projects can generate a valid claim, provided the business was genuinely trying to resolve a scientific or technological uncertainty.

Who Can Claim R&D Tax Relief? SME and Large Company Rules

Any UK trading company that is chargeable to Corporation Tax and runs a project meeting the R&D definition can claim under the merged scheme, whether it is an SME or a large company. SME status matters for ERIS, which is limited to loss making SMEs with enough R&D intensity.

Under HMRC’s R&D rules, a company is an SME if it has fewer than 500 staff, and either a turnover of no more than €100 million or a balance sheet total of no more than €86 million. The staff, turnover and balance sheet of any linked or partner companies must be included in that calculation, so group structure can affect the answer. Companies that don’t meet these thresholds claim under the merged scheme as large companies and can’t access ERIS, however R&D intensive they are.

Sole traders and partnerships cannot claim, because the relief works through Corporation Tax. A trading limited company is the usual claimant.

What’s Changed Since 2024, and What’s New in 2026?

The single biggest shift is the move to the merged scheme, which applies to accounting periods starting on or after 1 April 2024. It replaced the old separate SME and RDEC (Research and Development Expenditure Credit) regimes with one framework, based largely on the previous RDEC mechanism.

The net figures differ because the 20% credit is taxable. At the 25% main rate of Corporation Tax, £20,000 of credit leaves £15,000 after tax. At the 19% small profits rate it leaves £16,200.

A few other changes are worth flagging:

• The R&D intensity threshold dropped from 40% to 30% for accounting periods beginning on or after 1 April 2024, meaning more loss-making SMEs now qualify for the more generous ERIS rate.
• A claim notification form (CNF) is now mandatory for first-time claimants and businesses that haven’t claimed in the previous three years.
• It must be submitted within six months of the end of the accounting period: well before the standard 12-month Corporation Tax filing deadline.
• An Additional Information Form (AIF) must accompany every claim, setting out the technical detail behind the qualifying projects and costs.
• Since 1 April 2024, relief for overseas R&D and overseas subcontractor/externally-provided-worker costs is restricted to narrow exceptions — see below.
• Since 1 April 2024, the payable credit under both the merged scheme and ERIS is capped at £20,000 plus 300% of the company’s relevant PAYE and NIC liabilities for the period, carried over from the old SME scheme’s anti-abuse cap.
• On 18 May 2026, HMRC launched a free targeted advance assurance pilot, running to May 2027. It lets eligible SMEs get clarity on up to two specific higher risk areas of a claim before submitting it (see the advance assurance section below).
• The Autumn Budget on 28 October 2026 may bring further changes. The 2025 Budget left R&D rates unchanged, and businesses are generally advised to plan around the current rules rather than wait for another redesign.

What Is R&D Tax Relief Worth? A Worked Example

Take the Hertfordshire software firm from the start of this guide, which spent £100,000 of qualifying costs on its forecasting tool.

• If it is profitable and pays Corporation Tax at 25%, the merged scheme credit is worth about £15,000 after tax. At the 19% small profits rate it is about £16,200.
• If it is a loss making startup with R&D spend of at least 30% of its total costs, ERIS can be worth up to about £27,000, subject to the payable credit cap.

These figures are illustrative. They assume the project qualifies, the costs are fully evidenced, and the company has enough tax liability or losses for the relief to be used in full.

Overseas R&D and Contracted-Out Work: What’s Restricted

One of the most consequential, and most contested, changes from April 2024 is the territorial restriction on overseas costs. Relief for R&D undertaken outside the UK, and for overseas subcontractors or externally provided workers, is now only available where a company can show that the necessary conditions for the work genuinely don’t exist in the UK, that they do exist where the work was carried out, and that it would be wholly unreasonable to replicate them here. Cost or resourcing convenience alone doesn’t qualify.

Payments to unconnected subcontractors, and costs for externally provided workers, are also generally restricted to 65% of the amount paid, with different rules applying where the claimant and the subcontractor or staff provider are connected parties. Because HMRC expects contracts, correspondence and other evidence to support any overseas claim, it’s worth reviewing our guide to HMRC compliance checks before submitting one.

This is precisely the kind of area HMRC’s new targeted advance assurance pilot (see above) was designed to give SMEs earlier certainty on, since it’s one of the four specific areas the pilot covers.

Is R&D Tax Relief Still Worth It? Looking at the Numbers

Headlines about falling claim numbers only tell part of the story.

According to HMRC’s 2025 to 2026 annual report, spending on Corporation Tax R&D reliefs was £8.0 billion that year, which underlines how much support is still on the table. HMRC also processed 89% of payable credit claims within 40 days, ahead of its own 85% target.

Separately, HMRC’s latest R&D tax credit statistics, published on 29 September 2026 and covering 2024 to 2025, tell a more nuanced story. There were an estimated 40,325 claims, down 17% on the previous year, with SME claims down 19% and large company claims up 4%. Yet the total relief claimed rose 5% to £8.2 billion on £51.0 billion of qualifying spend, and the average claim rose by about 27%. HMRC believes the Additional Information Form is a key driver of the fall in claim numbers.

The value is also concentrated. Around 58% of claims were worth £50,000 or less in relief but made up only 6% of the total, while 6% of claims accounted for 69% of the relief. In other words, fewer businesses are claiming, but those that do are claiming more. For smaller businesses the lesson is not that relief has gone, but that a claim needs to be well evidenced and proportionate to the effort involved.

Compliance has also improved. HMRC’s annual report estimates that error and fraud in the R&D reliefs fell from 17.6% for 2021 to 2022 down to 6.4% for 2023 to 2024, with an illustrative estimate of about 5.3% for each of the two years since. This suggests the reforms are filtering out weak claims while keeping the door open for legitimate ones.

A practical rule of thumb: in our experience, if your business is spending £50,000 or more a year on potentially qualifying R&D, it’s worth having your position properly assessed. At £100,000 or above, the potential benefit typically justifies the time spent preparing a robust claim.

Worth also depends on cost. Preparation time, evidence gathering, any adviser fees and the chance of an enquiry all come off the benefit. HMRC often pays a claim first and checks it later, so an enquiry can arrive after the money has been received.

How Do You Know If Your Business Should Claim?

Ask yourself the following before committing time to a claim:

• Did you set out to resolve a genuine technical uncertainty? Not “was this hard for us” but “would a competent professional in this field have known how to solve it in advance?”
• Was the work more than routine development? Standard feature builds, cosmetic changes and known bug fixes generally won’t qualify on their own.
• Can you evidence the work? Technical notes, project logs, time-tracking and correspondence all help build a credible claim. Retrofitting evidence after the fact is far harder.
• Does the spend clear a sensible threshold? Below roughly £50,000 in qualifying costs, the relief may still be worth claiming, but the administrative effort needs weighing against the return.
• Have you claimed before, or would this be your first time? First-time claimants and anyone who hasn’t claimed in the last three years must submit a claim notification form within six months of their accounting period end. Miss it and the claim can’t be made at all.

If you answer yes to most of these, it’s worth a proper assessment rather than dismissing R&D relief on the strength of headlines about falling claim numbers.

How to Claim R&D Tax Relief: Step by Step

1. Check your company is eligible and the work meets the R&D definition.
2. Submit a claim notification form if you are a first time claimant or have not claimed in the last three years. The deadline is six months after the end of the accounting period.
3. Prepare the technical narrative and cost workings, backed by project records.
4. Submit the Additional Information Form to HMRC before filing your Corporation Tax return.
5. Include the claim in your Corporation Tax return within two years of the end of the accounting period.
6. Keep your evidence in case HMRC opens an enquiry.

What Could Go Wrong? Common Reasons Claims Get Rejected or Delayed

HMRC has tightened scrutiny considerably since 2022, and enquiries are now far more common than they used to be. The most frequent reasons claims get challenged, delayed or rejected include:

• A vague or generic technical narrative: HMRC wants to see exactly what was uncertain, why it was uncertain, and what was tried. Copy-paste descriptions of “innovation” rarely survive scrutiny.
• Routine work dressed up as R&D: Standard feature development, cosmetic changes and implementing known solutions don’t qualify simply because they were difficult to schedule or resource.
• Misaligned or over-claimed costs: Costs that fall outside HMRC’s qualifying categories, or expenditure that’s been inflated relative to the actual R&D undertaken, are a common trigger for enquiries.
• Thin supporting evidence: A claim without a clear link between the technical narrative and the cost breakdown gives HMRC little to approve.
• Missed filing deadlines: Errors on the Additional Information Form, or missing the six-month claim notification deadline entirely, can invalidate an otherwise strong claim.
• Disproportionate claims: A claim that looks large relative to the size of the business, without evidence to back it up, tends to attract closer attention.
• Overseas costs claimed without evidence: Since the 2024 restriction, claiming overseas subcontractor or worker costs without documented proof that UK conditions genuinely weren’t available is an increasingly common trigger for enquiry.

Where a claim is later found to be invalid, HMRC can seek repayment of any benefit already paid, plus a penalty. The size of the penalty depends on the behaviour behind the error, from a careless mistake up to a deliberate inaccuracy, where it can reach 100% of the tax at stake.

Be cautious about advisers who promise a result, or who charge only a percentage of what is recovered without properly testing the claim. Any agent involved must be named to HMRC on the notification and additional information forms.

Why Work with Julian Hobbs & Co on Your R&D Tax Relief Claim

Preparing a compliant R&D claim now involves more moving parts than most business owners have time to track: the claim notification form, the Additional Information Form, a technical narrative that satisfies HMRC’s current standards, and a cost breakdown that holds up under an enquiry.

At Julian Hobbs & Co, we work through each stage with you: identifying which projects genuinely qualify, building the evidence trail as the work happens rather than after the fact, and preparing a claim positioned to withstand HMRC scrutiny. As an outsourced finance director firm, we also help you plan the numbers around the claim, including your tax position, whether you are profitable or loss making, your R&D intensity and the cash flow effect of the credit. For clients who aren’t yet sure whether their work qualifies, we start with a straightforward assessment before any commitment to proceed.

Conclusion

R&D tax relief hasn’t disappeared. It has been recalibrated.  Rates are lower for many businesses than they were before 2023, the compliance bar is higher, and deadlines such as the claim notification form now arrive within months of your accounting period end. But roughly £8 billion of relief is still being claimed each year, HMRC is paying credit claims faster than its own target, and businesses doing real technical work continue to benefit meaningfully from the relief.

The businesses that lose out tend to be the ones that either assume the relief no longer applies to them, or submit weak claims without the evidence to back them up. Neither mistake is necessary. R&D relief is also most effective when it’s treated as part of your wider corporation tax planning, rather than a once-a-year afterthought. If your business has spent money developing new products, processes or software in the last two years, get in touch with Julian Hobbs & Co for a straightforward assessment of whether an R&D tax credits claim is worth pursuing.

FAQs: Frequently Asked Questions