Innovation isn’t just for large tech companies or scientists in lab coats. Every day, UK SMEs are developing new products, improving processes and solving business challenges, and many of these activities can qualify for R&D Tax Credits.
R&D Tax Credits are a government incentive designed to encourage innovation. They allow you to claim back a portion of your eligible costs, reducing your Corporation Tax bill or even generating cash refunds.
Why it matters
• Thousands of SMEs miss out every year by assuming they don’t qualify.
• Claims can range from a few thousand pounds to hundreds of thousands, depending on your projects and costs.
• Understanding and claiming correctly ensures you maximise your benefits without risking HMRC rejection.
This guide gives you a step-by-step approach to see if your business qualifies; identify eligible costs; and submit a compliant claim.
Everyday innovation counts
Many business owners mistakenly think R&D tax relief only applies to:
Scientists in labs | High-tech products | Large corporations
The truth is that R&D can happen in any sector. Innovation includes:
• Developing a new product or service
• Improving an existing product or process
• Creating more efficient systems or software
• Testing materials, methods, or prototypes
Examples:
• A food manufacturer developing a new recipe that improves taste or shelf life
• A construction firm trialling new materials to reduce costs
• A software company creating a tool to streamline internal processes
Innovation doesn’t have to be ground-breaking; it just needs to solve a technical or business challenge in a new or improved way.
Eligibility checklist
Ask yourself, does your project…
Aim to create a new or improved product, process or service?
Attempt to solve technical challenges?
Involve testing or trialling new methods?
Explore efficiency improvements in operations?
Require original thinking or experimentation?
If you answered yes to any of these, your project may qualify for R&D tax relief.
Qualifying costs explained
Eligible costs often include:
Staff: Salaries, wages, NIC, and pension contributions for employees directly involved in R&D.
Software: Licences or subscriptions used for R&D purposes.
Material & consumables: Products, prototypes, and raw materials used in development.
Subcontractors: Fees for specialist work outsourced to third parties.
Expert advice: Keep detailed records of hours, costs, and projected notes - documentation is key to a successful claim.
The claim process step-by-step
Identify eligible projects – Review past and current work to see which activities meet R&D criteria. 1.
Document costs – Track staff time, materials, subcontractors, and software usage. 2.
Prepare a technical narrative – Explain the challenges faced, solutions tested, and innovations developed. 3.
Calculate your claim – Add up eligible costs and apply the correct R&D tax credit rate. 4.
Submit to HMRC – Include calculations and technical narrative with your Corporation Tax return. 5.
Review & respond – Be ready to provide additional information if HMRC queries your claim. 6.
Mistakes to avoid
Avoid common pitfalls to reduce risk:
Overclaiming: Only include genuinely eligible costs.
Incomplete records: Without evidence, HMRC may reject your claim.
Ignoring deadlines: Claims must be made within two years of the accounting period’s end.
Poor technical narrative: Be clear, concise, and focus on innovation and problem-solving.
Expert advice: A detailed project log and timesheets make claims easier and more defensible.
Case studies
Case Study 1: Sports equipment
Sector: Textiles & Fabrics
This company is a manufacturer in the sports industry and is involved in the creation of foldable cycling helmets
Case Study 2: Point-of-sale manufacturer
Sector: Manufacturing & Engineering
This group of companies combine to design, fabricate and install bespoke display products for the point-of-sale (POS) industry
Case Study 3: Robotics
Sector: Software & IT
The company has excelled in producing first-class robotics for its widespread customer base.
What to do this month to start a claim
Review your projects from the past 12–24 months for eligible activities. 1.
Gather cost data for staff, materials, software, and subcontractors. 2.
Create a simple project log detailing technical challenges and solutions. 3.
Use our checklist to confirm eligibility before preparing a claim. 4.
Speak with a tax professional or submit your claim confidently using HMRC guidelines. 5.
