First R&D tax credit claim for UK startups: practical checklist to secure non-dilutive cash

First-Time R&D Credit Claim: UK Startup Checklist

For UK startups navigating the early stages from pre-seed to Series B, managing runway is a constant priority. While equity funding often dominates the conversation, a crucial, but often misunderstood, source of cash sits within your tax return. The UK's R&D tax credit scheme is a powerful form of non-dilutive funding that can inject capital directly back into your business, extending your development runway without giving up a single point of equity. Yet, for founders without a dedicated finance team, the process can seem opaque. This guide provides a practical checklist on how to file your first R&D tax credit claim, focusing on what qualifies, how to build your evidence, and how to submit it correctly to HMRC.

Understanding UK R&D Tax Credits for Startups

At its core, the R&D tax credit is a UK government incentive designed to reward companies for investing in innovation. It works by reducing your corporation tax liability or, for many loss-making startups, providing a direct cash payment. This is not a grant you apply for; it is a statutory relief you claim through your Company Tax Return. Understanding these basics is essential for any UK startup looking for tax incentives.

For most early-stage tech companies, the key details are straightforward.

Two main schemes exist: the SME Scheme and the Research and Development Expenditure Credit (RDEC).

Gov.uk guidance on scheme changes indicates these are merging, but for now, the SME scheme is the more generous and is the one most pre-seed to Series B startups will use.

The benefits can be significant.

For expenditure from 1 April 2023, loss-making SMEs can claim a cash credit of up to 18.6p for every £1 of qualifying spend.

This rate is detailed in the official reforms summary. There is also a more generous rate available, as

The credit rate is higher for 'R&D intensive SMEs'.

(UK Government Finance Act).

Crucially, you do not need to be profitable to benefit. Your claim is also retrospective.

Claims are retrospective and can only be made for costs incurred in the last two completed accounting periods.

(HMRC Guidelines). This gives you a window to look back and capture value from work already completed.

R&D Tax Credit Eligibility UK: What Qualifies for Your First Claim?

This is where most founders get stuck. The first step in preparing your R&D claim is to distinguish between routine business development and genuine R&D in HMRC's eyes. This involves passing two main tests: the Project Test and the Cost Test.

The Project Test: Technical Uncertainty

HMRC's definition of R&D hinges on two principles: seeking an 'advance in science or technology' and facing 'technical uncertainty' while doing so. An advance does not mean inventing something entirely new to the world; it can be an appreciable improvement to an existing technology or process. The core test is technical uncertainty. This is the doubt over whether a particular technical goal is achievable or how to achieve it in practice.

This is not commercial uncertainty, like whether a market exists for your product. It is about the ‘how’, not the ‘what’.

Consider a SaaS startup. A non-qualifying project would be building a standard CRUD application using a well-established framework to manage customer data. The architecture is known and success is predictable. In contrast, a qualifying project could be developing a novel, real-time data synchronisation engine to handle millions of simultaneous edits with near-zero latency. Here, the team would face technical uncertainties around data consistency and performance scaling that are not readily solvable with existing public knowledge.

For a biotech startup in the preclinical phase, almost all work can qualify. A qualifying project could involve developing and testing a novel assay to measure a new compound's efficacy. The uncertainty lies in whether the assay can be validated to be specific, sensitive, and reproducible for its intended purpose.

The Cost Test: Identifying Qualifying Expenditure

Once you have identified a qualifying project, you can attribute a portion of its associated costs to the claim. The main categories of qualifying R&D expenditure include:

• Staff Costs: This is more than just net salary. You can claim for the gross salary, employer's National Insurance contributions, and employer pension contributions of staff directly and actively engaged in the R&D. You must apportion their time based on their involvement.
• Subcontractors: If you use external contractors for a specific technical challenge, their costs can often be included. According to HMRC Guidelines,

For the SME scheme, you can typically claim 65% of payments made to unconnected subcontractors.

• Software: You can claim for the cost of software licences used directly in the R&D process. This might include specialised CAD software for a deeptech firm or a portion of cloud hosting costs for development and testing environments for a SaaS company. It does not cover costs for the live production environment serving customers.
• Consumables: This category covers materials consumed during the R&D process, such as chemicals for a biotech company or materials for building prototypes in a hardware startup.

Preparing R&D Claim Evidence Without the Headache

An R&D claim is only as strong as its supporting evidence. HMRC needs a clear audit trail connecting the costs you are claiming to the specific R&D projects you have described. The key is to build this evidence contemporaneously, not two years after the fact. Assembling R&D claim supporting documents should be part of your operational rhythm.

The Technical Narrative

This is a short report that tells the story of your R&D. It does not need to be an academic paper, but it must clearly outline:

1. The Scientific or Technological Baseline: What was the state of the art before you started?
2. The Advance Sought: What improvement were you trying to achieve?
3. The Technical Uncertainties: What specific technical challenges did you face that a competent professional in the field could not readily resolve?
4. The Work Done: What activities did you undertake to overcome these uncertainties?

Contemporaneous Records

Your best defence against an HMRC enquiry is a set of records created during the project. For most early-stage businesses, you can leverage the tools you already use. Project details in Jira, technical discussions in Google Docs, and commit histories in Git all serve as powerful, time-stamped evidence of the R&D process.

A scenario we repeatedly see is startups trying to recreate timesheets months or years later. A better approach is a simple, defensible spreadsheet. At the end of each month, ask your technical team to estimate the percentage of their time spent on each qualifying R&D project. This contemporaneous estimate is far more credible than a retroactive guess.

For financial evidence, use your accounting software. In Xero, for example, you can set up a 'Tracking Category' called 'Project Type' with options like 'R&D' and 'Business as Usual'. When you enter an invoice for a subcontractor or software licence, you can tag it to the R&D category. This makes it simple to run a report at year-end showing all qualifying expenditure.

The HMRC R&D Claim Process: How to File Correctly

Once your accounting period is over and you have your evidence, the final step is filing the claim. The HMRC R&D claim process has become more structured in recent years, making it vital to follow the correct procedure.

First, a new mandatory step has been introduced.

As of April 2023, an 'Additional Information Form' must be submitted online to HMRC before the CT600 is filed.

As explained in BDO's guide to the Additional Information Form, this digital form requires a breakdown of qualifying costs and a description of the R&D activities.

Only after submitting this form can you complete the main filing.

The R&D claim is submitted as part of the annual Company Tax Return (CT600).

(HMRC Corporation Tax Regulations). Your accountant will include the specific R&D figures in the relevant boxes of the tax return.

It is critical to be mindful of deadlines.

The filing deadline is two years after the end of the accounting period in which the expenditure occurred.

(HMRC Guidelines). Missing this window means losing the claim for that period entirely.

After submission, the process is generally efficient.

HMRC typically processes cash credit payments within 40 days of submission.

(HMRC Service Level Agreements). For a startup managing cash flow closely, this predictable timeline is invaluable.

Checklist for Your First R&D Claim

For a founder preparing their first claim, the process can be distilled into four key actions. Getting this right from the start transforms the R&D tax credit from a complex task into a regular, reliable source of non-dilutive capital.

1. Identify Projects Early: Train your technical leads to spot projects that involve overcoming technical uncertainty, not just commercial hurdles. Make this part of your project kickoff process.
2. Track Costs Contemporaneously: Use the tools you already have. Tag R&D-related invoices in Xero with a tracking category. Use a simple monthly spreadsheet for staff time allocation. This avoids painful and inaccurate reconstruction work later.
3. Document as You Go: Do not wait until the claim deadline to write your technical narrative. Use project documentation from Confluence, Google Docs, or Jira to build the story of your R&D in real-time.
4. File Correctly: Remember the two-step process: submit the online Additional Information Form first, then file your CT600. Keep the two-year deadline in mind to ensure you never miss out on a claim period.

By embedding these simple habits into your operations, you can ensure you are consistently capturing the full value of your innovation. Learn more at the R&D tax credit hub.

Frequently Asked Questions

Q: Can I claim R&D tax credits if my startup is not yet profitable?

A: Yes. For loss-making SMEs, the R&D tax credit scheme provides a payable cash credit. Instead of reducing a tax bill you do not have, HMRC will make a cash payment directly to your company, providing a valuable source of non-dilutive funding for your ongoing development work.

Q: What are the most common R&D tax claim mistakes to avoid?

A: Common mistakes include claiming for non-qualifying 'business as usual' projects, failing to keep contemporaneous records of work and costs, and missing the filing deadline, which is two years after the end of the accounting period. Another frequent error is incorrectly calculating apportioned staff costs or subcontractor fees.

Q: How 'innovative' does my project need to be to qualify for R&D tax relief?

A: The project does not need to be a global breakthrough. The key is seeking an 'appreciable improvement' to an existing technology or process and facing 'technical uncertainty' in doing so. If a competent professional in the field cannot readily deduce the solution, it likely involves qualifying R&D.