UK R&D Tax Relief for 2025: What Companies Need to Know

Research and Development (“R&D”) tax relief has long been a valuable incentive for businesses innovating in the UK. However, this calendar year (2025) will be the first in which companies are now adapting to a newly revised iteration of the incentive.

For accounting periods beginning on or after 1 April 2024 (so a year-end 31 March 2025 or later), companies will access R&D tax relief either through (i) the new Research and Development Expenditure Credit [“new RDEC”] or (ii) the enhanced R&D Intensive Support Scheme [dubbed “ERIS”].

The new RDEC will be available to all companies undertaking qualifying R&D activities, whereas the ERIS will only be available to loss-making R&D intensive[1] SME companies. Broadly speaking, the new RDEC offers tax relief of up to 15p-16p in every £1 spent on qualifying R&D expenditure, whereas the ERIS could offer tax relief of up to 27p in every £1 spent. The mechanics of the new RDEC and ERIS incentives are similar to the previous old RDEC and SME incentives respectively, but with some significant changes that companies will need to be mindful of.

These changes cover the topics of grants & subsidies, overseas R&D expenditure, customer-facing R&D environments, above-the-line tax credits and HMRC compliance measures.

[1] For a company to be “R&D-intensive” it must meet a threshold of at least 30% of its total expenditure in an accounting period being qualifying R&D expenditure.

The interplay between grants, subsidies, and R&D tax relief used to be more complicated. Historically, companies receiving grants for their R&D projects would be required to claim partially or fully under the old RDEC incentive.

However, for accounting periods beginning on or after 1 April 2024, companies will now be eligible to make claims under the new RDEC or ERIS regardless of whether their R&D projects have been grant-funded.

This is welcome news for companies because it helps to reduce the administrative burden of understanding the relationship between grants and R&D tax claims by creating a single rule for all. The news is particularly beneficial for the loss-making, R&D intensive SME companies who can benefit from the grant funding alongside a higher rate of tax relief.

The historic subsidy rules at s1138 CTA09 have now fallen away from the legislation. Whilst these rules were traditionally interpreted as mostly relating to grants and subsidies, HMRC sought to argue in the courts that customer payments for R&D could be caught by the subsidy rules at s1138 CTA09. However, there have been three separate first-tier tax tribunal results[2] that have rejected HMRC’s viewpoint.

This change enables companies to apply for grants and subsidies knowing their ability to claim R&D tax relief will not be adversely affected.

[2] Quinn London Ltd v HMRC [2021 – UKFTT 437], Collins Construction Limited v HMRC [2024 – UKFTT 951) and Stage One Creative Services Limited v HMRC [2024 – UKFTT 1059).

Previously, UK companies that made R&D claims could obtain tax relief on their worldwide expenditure. However, for accounting periods beginning on or after 1 April 2024, stricter rules will now generally prevent expenditure on overseas sub-contractors or externally provided workers from being eligible in an R&D claim.

The new legislation at s1138A CTA09 outlines that there may be conditions that mean it is necessary for the R&D to be undertaken outside of the UK. In these instances, it needs to be evidenced that it would be wholly unreasonable for these conditions to be replicated in the UK. These conditions are geographical, environmental, or regulatory in nature but specifically do not include the cost of R&D or availability of workers to perform the R&D.

This change underscores the UK government’s commitment to incentivizing domestic R&D. Companies relying on overseas facilities or expertise must re-evaluate their strategies and documentation to ensure compliance.

Sub-contracted R&D, or “contracted out R&D”, had become an area of complexity for UK companies making R&D claims. In a commercial environment between a customer and a company doing the R&D, the issue of who owned an R&D project (and therefore who had the right to make the claim for R&D tax relief) needed careful consideration. Previously, HMRC guidance was issued to help companies operating in this space evaluate indicators of R&D ownership. These indicators included intellectual property, control of the R&D activities, and the financial arrangements of the contract.

HMRC’s interpretation of this guidance evolved to become increasingly strict, suggesting that the mere existence of a contract between a customer and company could be enough to determine that R&D was contracted out (meaning the customer would be entitled to make claims for tax relief, not the company doing the R&D). The same first-tier tax tribunals above that explored subsidised R&D in a commercial setting also tested the waters on contracted out R&D in a commercial setting – HMRC’s argument again being rejected by the courts.

For accounting periods beginning on or after 1 April 2024, the legislation has sought to create a more definitive picture surrounding customer-facing R&D projects (“contracted out R&D”). The key wording to understand in the legislation is whether a customer “intended or contemplated” the undertaking of R&D activities as part of their engaging a company, and how the “surrounding circumstances” of a customer-company relationship could influence ownership of R&D. If customers can illustrate they have technical competence in the R&D activities being contracted out, this may further strengthen their opportunity to claim ownership of the R&D project and ability to claim the tax relief.

Companies undertaking R&D in a customer-facing environment must understand their contracts, maintain clear agreements and hold detailed records to substantiate their position if they are to claim ownership of an R&D project in order to help avoid challenges from HMRC.

As the old SME incentive tails away, companies that were used to making claims under this mechanism will now need to become more familiar with above-the-line tax credits. Under the old SME incentive, companies could claim an enhanced deduction[3] on their qualifying R&D expenditure from their taxable trading profits thereby reducing their corporation tax bill and, in some cases, enable the payment of cash tax credits.

However, for accounting periods beginning on or after 1 April 2024, the mechanism of the new RDEC incentive does not follow the same tax treatment. Instead, under the new RDEC, a company can receive an above-the-line tax credit of 20% of their total qualifying R&D expenditure for an accounting period. By being above-the-line, this tax credit is (i) able to be recognised as income in the profit & loss account and (ii) therefore subject to corporation tax. The tax credit can then be used to offset against corporation tax liabilities in the first instance (thereby creating the 15p-16p rate of tax relief), or other tax liabilities, before potentially being payable as a cash tax credit.

SME companies will need to familiarise themselves with the tax treatment of above-the-line tax credits which will attract a lower rate of tax relief than they are used to under the old incentive, as well as understanding the priority of how the new RDEC tax credit is realised. However, the ability to recognise the above-the-line tax credits in the profit & loss account will help strengthen the position of a company’s financial statements. These rules are not applicable to the loss-making, R&D intensive SME companies claiming under ERIS.

[3] 130% before 1 April 2023, then 86% thereafter.

In an effort to combat perceived error and fraud within the R&D incentives, HMRC subsequently increased their compliance activities surrounding it. This scrutiny usually takes the form of HMRC investigations (or compliance checks) which have increased significantly. In addition, HMRC have introduced mandatory reporting requirements for companies making claims for R&D tax relief. These include the following:

• Pre-notification Requirements: Companies may need to notify HMRC in advance of making an R&D claim. Broadly speaking, this will be compulsory for first-time claimants or for companies who have not made claims in the past three years. The pre-notification must be made to HMRC no later than 6 months after the end of the accounting period in which the R&D took place.

• Additional Information Form: All companies are now required to submit increased technical and financial information relating to their R&D claim. This information can include information from any sub-contractors utilised and details of the key contacts assessing the validity of the R&D projects themselves. If this Form is not submitted, HMRC will reject the claim for tax relief.

The incentive remains valuable to companies who do qualify, but the compliance measures surrounding it may mean that genuine claimants may miss out either through a lack of awareness of their reporting requirements, or because they may be put off making claims altogether because of the landscape in which HMRC now police it. The number of R&D claims made by companies in the UK saw a significant decrease of 21% in the 2022-23 tax year[4] and, although it is early to make predictions, it is anticipated the number of claims will reduce in the 2023-24 tax year as well.

[4] Statistics revealed by HMRC on 26 September 2024.

Navigating the UK’s R&D tax relief landscape in 2025 requires careful planning and attention to detail. By understanding the implications of grants and subsidies, the restrictions on overseas expenditure, the treatment of contracted R&D, the benefits of above-the-line credits, and HMRC’s compliance expectations, businesses should understand where they can maximize their claims but also minimise risks. Engaging with regulated tax professionals and staying informed about updates is essential to leveraging this valuable incentive effectively.