How R&D tax-credits are paid to businesses?

R&D tax credits can be paid in several ways depending on your business and its tax position; they are credited variously as: direct cash rebates, loss-reliefs, cash-credits, and combination reliefs.

R&D tax credits pay out the equivalent of up to 33p for every £1 you spend on qualifying R&D within loss-making small businesses. Profitable companies can expect to claim back 25% of their R&D costs. This expenditure covers staff salaries, pensions and National Insurance contributions (NICs); the use of freelancers or subcontractors; the cost of consumables and materials as part of the R&D process; and outlay on essential software.

What’s more: businesses may claim R&D tax relief for up to two years beyond the end of the financial year their R&D work relates to. There are several ways that R&D tax credit may be paid to those who use the R&D tax credit incentives; each is explained below.

Direct cash rebates

If you are claiming for R&D tax relief for a financial year in which you have already paid your Corporation Tax, your company tax return form for the corresponding year can be amended and HMRC will issue your business with a cash rebate.

Loss reliefs

If your business is loss-making following an R&D tax credit claim, it is possible to carry back the enhanced R&D losses to the previous financial year. You can also carry the loss forward to be offset against potential profits in the next financial year. It can also be surrendered as group relief.

If you choose to make an R&D tax credit claim for the same year as your latest Corporation Tax return (and your business is profitable), you can choose to use your relief to reduce your Corporation Tax bill.

Cash credit

For loss-making companies, it’s also possible to claim a cash credit from HMRC. This can only be transferred if you are prepared to surrender the enhanced losses of your R&D. This option is particularly beneficial for those who need help with cash-flow.

Combination reliefs

In the event taxable profits become loss-making as a consequence of R&D credit claims, it’s possible to use your relief in multiple ways. For example, you can somewhat reduce your company’s Corporation Tax, whilst carrying forward or back some of your R&D losses to offset as profits.

How R&D tax credits are paid to businesses

R&D tax credits can be delivered in different ways depending on your company’s tax position. This includes reducing your Corporation Tax bill, receiving a cash credit from HMRC, or applying reliefs to current or future losses.

Importantly, eligibility and outcomes vary based on your business structure, profitability, and the nature of your R&D activities. HMRC applies a specific definition of R&D for tax purposes, which differs from how businesses might typically define research and development. See HMRC’s definition for more detail.

What could your business receive?

Depending on your tax position and scheme:

• Loss-making SMEs may receive up to £18.60 per £100 of R&D spend under the new rules (April 2023 onwards), or higher under older rules.
• Profitable SMEs can reduce their Corporation Tax liability — previously worth up to 25% of qualifying spend, now reduced following recent reforms.
• R&D intensive SMEs may qualify for enhanced support with cash credit rates closer to historical levels (up to 27%).

Note: These rates have recently changed under merged SME and RDEC schemes and may vary based on when your accounting period falls.

How are payments or reliefs received?

Here are the main ways companies can benefit:

1. Reducing your Corporation Tax bill

If your company is profitable and claiming under the SME scheme or RDEC, your qualifying R&D expenditure may reduce your Corporation Tax liability.

2. Cash credit for loss-makers

Loss-making companies can surrender their enhanced losses to HMRC in return for a cash credit. This is especially helpful for early-stage businesses or those with negative taxable profits. The cash benefit is paid directly into your bank account once the claim is processed.

3. Loss relief

If you’re not claiming the cash credit, you may instead carry forward or carry back the enhanced R&D-related losses to offset against other profits. Alternatively, you may surrender the loss to a group company.

4. Combination of reliefs

Some companies use a combination: e.g., reduce Corporation Tax in part and carry forward some losses for future use. An experienced R&D adviser can help assess the most tax-efficient route for your situation.

5. Cash repayment of overpaid tax

If your claim is submitted after your CT600 has already been filed and tax paid, HMRC may issue a repayment of Corporation Tax following the amended return, often seen as a ‘cash rebate’.

Tailoring your R&D claim to your business

R&D tax relief can be a valuable incentive, but how you benefit depends on a range of factors — including your tax position, company structure, and how well your work aligns with HMRC’s definition of qualifying R&D. Working with an expert adviser ensures your claim is structured appropriately and paid in the most beneficial way for your business.