R&D Tax Relief for SMEs in 2025: What You Need to Know
As a Chartered Tax Advisor with over 20 years of experience, I have seen the Research and Development (R&D) tax relief regime evolve significantly. In 2025, it remains one of the most valuable incentives available to innovative UK businesses, but the rules have changed.
Why R&D Tax Relief Matters
R&D tax relief rewards businesses that push the boundaries of science and technology. It reduces the cost of innovation and can return much-needed cash to growing businesses. For many early-stage companies, this support provides vital funding to reinvest in product development, hiring, and scaling.
The 2025 R&D Tax Relief Landscape
From 1 April 2024, the government merged the two previous schemes (the SME scheme and the RDEC scheme) into a single Merged R&D Expenditure Credit.
Here's what that means in practice:
20% expenditure credit on qualifying R&D costs, equating to around 15% net benefit for profit-making companies
Enhanced support up to 27% payable credit for companies spending 30%+ of total costs on R&D
Claims now possible even on grant-funded projects - restriction removed from April 2024
Key Benefit Rates
- • For profit-making companies: Net benefit of around 15%
- • For loss-making companies: Slightly higher benefit at around 16.2%
What Costs Qualify?
The definition of R&D has not changed. HMRC still expects projects to aim for an advance in science or technology and to involve uncertainty that a competent professional cannot easily resolve.
Typical qualifying costs include:
- Staff directly involved in R&D
- Employer NIC and pension contributions
- Time spent on qualifying projects
- Technical team salaries
- Consumables used in R&D
- Software licences for development
- Testing materials and equipment
- Prototype development costs
- UK-based subcontracted R&D
- Externally provided workers (restricted)
- Specialist consultancy services
- Technical advisory costs
Important Restriction
Most overseas subcontractor and worker costs are no longer eligible unless the work must be done abroad for legal or regulatory reasons.
Grant Funding and R&D Claims
In the past, if your R&D project received grant income or other subsidies, your company often lost access to the more generous SME scheme and had to claim under the less valuable large company scheme.
The good news is that from April 2024 this restriction has been removed. You can now claim R&D tax relief on projects even if they have been part-funded through grants. This change provides welcome clarity and ensures that innovative SMEs do not lose out simply because they also secured external funding.
Other Key Rules to Know
Cap on cash repayments:
For loss-making companies, cash repayments are capped at £20,000 plus 300% of the company's PAYE/NIC bill. There are exemptions for businesses that are creating and managing their own intellectual property.
Notification requirement:
If this is your first claim, or 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 you intend to claim.
Documentation and compliance:
HMRC has tightened its review process, with more claims being scrutinised. It is vital to keep clear technical records, project notes, and cost breakdowns.
Time limit:
You still have two years from the end of your accounting period to make a claim.
Common Pitfalls
Many companies miss out or face challenges because of:
- Failing to identify projects that meet HMRC's definition of R&D
- Claiming for routine development rather than genuine scientific uncertainty
- Poor record-keeping, particularly for staff time spent on R&D
- Assuming overseas costs qualify when they do not
- Missing the HMRC notification deadline
How to Maximise Your Claim
- Keep records from day one – log staff hours, project milestones, and technical challenges
- Review projects regularly – you may be carrying out qualifying R&D without realising it
- Check grant interactions – assess how funding aligns with your R&D activities
- Seek professional advice – expert guidance can prevent stressful enquiries
Final Thoughts
The 2025 R&D tax relief regime offers valuable support for innovative SMEs, but the rules are more complex than ever. The removal of restrictions on grant-funded projects is a major win for small businesses, but the merged scheme and new compliance requirements mean claims must be carefully prepared.
As with any tax matter, the right advice at the right time can protect your business and maximise your benefit. If you are developing new products, processes, or technologies, it is worth reviewing whether your company qualifies.
Disclaimer: R&D tax credit rules are complex and subject to change. This article provides general guidance only. Always seek professional advice for your specific circumstances and ensure claims are prepared by qualified specialists.
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