The world of R&D tax relief can sometimes feel like trying to read Shakespeare through a foggy snorkel. Even the simplest of questions, like which entities can claim R&D tax credits, come with caveats.

Luckily, we’re here to clear it up. We’ll cut through the confusion and walk you through exactly which types of companies can (and can’t) claim R&D tax credits in 2025, plus what the new Merged Scheme means for your claims going forward.

Corporation Tax is King

Before we dive into the specifics, here's the fundamental rule that governs everything: only companies that are chargeable to UK Corporation Tax can claim R&D tax credits.

This isn't just a technicality. It's the foundation for the entire R&D tax relief system. Think of Corporation Tax liability as your entry ticket to the R&D tax credit party. Without it, you're not getting through the door, no matter how innovative your work might be.

Who Can Claim R&D Tax Credits?

Limited Companies are the Clear Winners

If you operate as a UK limited company, congratulations! You've got the clearest path to R&D tax credits. Limited companies are subject to Corporation Tax on their profits, which means they automatically meet the primary eligibility criterion.

Whether you're a private limited company (Ltd) or a public limited company (PLC), the same rules apply. You must be a going concern, subject to UK Corporation Tax, and meet the relevant criteria to determine which scheme you'll claim under.

Companies Limited by Guarantee: Surprisingly Eligible

Here's where things get interesting.

Companies limited by guarantee can indeed claim R&D tax credits, provided they meet all the standard R&D tax eligibility criteria. This often comes as a surprise to many people, particularly those running not-for-profit organisations or research-focused entities.

The key point here is that being limited by guarantee doesn't automatically make you exempt from Corporation Tax. If your company limited by guarantee generates profits from its activities, even if those profits are reinvested rather than distributed to shareholders, you may still be liable for Corporation Tax. And where there's Corporation Tax liability, there's potential for R&D tax credit claims.

This can be particularly relevant for research institutions, technology transfer companies, or collaborative research organisations that operate on a not-for-profit basis but still generate taxable income from their activities.

Group and Subsidiary Companies

This relationship is a little complicated.

If one part of your group is doing the heavy lifting on R&D, that entity can claim the credit, even if the benefit flows across the group. The key is that the claiming entity must be the one paying Corporation Tax on profits related to the R&D activities.

More formally, when companies conduct R&D as part of a partnership, each corporate partner can claim expenditure credits individually. They do this through their CT600 tax return, claiming their share of the R&D costs while recording this as taxable income in their company accounts. For the research to qualify for credits, it must relate to a business that the partnership either currently runs or plans to run. The rules become more complex when considering group companies.

If we imagine the partnership as a single company within a corporate group, then the special "R&D for group" rules might apply. The group company rules require looking at the bigger picture. When a main contractor company and a subcontractor company belong to the same corporate group, you must examine both companies' activities together. This helps determine whether the subcontractor's work qualifies as relevant R&D.

Consider this practical example, where one group company handles all testing procedures for the other group companies. Normally, testing alone wouldn't qualify as relevant R&D. However, if that testing supports another company's qualifying R&D project within the same group, the testing company can claim relief for their qualifying R&D expenditure. This flexibility allows groups to organise their R&D activities efficiently while still accessing the available tax benefits.

Who Cannot Claim Directly?

Limited Liability Partnerships have a complicated middle ground

LLPs present one of the most misunderstood areas in R&D tax credit eligibility. The short answer is that most LLPs cannot claim R&D tax credits directly because they're typically "tax transparent". Their profits usually flow through to individual partners who pay personal tax rather than the LLP paying Corporation Tax.

However, there's an important exception that many people miss.

If an LLP has a corporate member (a limited company as a partner), then that corporate member may be able to claim R&D tax relief on its share of the LLP's R&D activities, provided the corporate member is subject to Corporation Tax on its share of the profits.

This creates an interesting planning opportunity. If you're doing innovative work through an LLP structure, having at least one corporate partner could unlock access to R&D tax credits. The corporate partner would claim relief proportional to its involvement in the R&D project and its share of the profits.

Think of it this way, the R&D tax credit system follows the tax liability. If Corporation Tax is being paid on the profits from R&D activities, then there's potential for relief, even if it's flowing through a more complex partnership structure.

Sole Trader? Sorry, You’re Out of Luck!

Since sole traders pay Income Tax rather than Corporation Tax, they cannot access R&D tax credits directly. This is one of the clearest exclusions in the system. Even if you're a brilliant innovator working alone, developing cutting-edge technology or revolutionary processes, the R&D tax credit system simply isn't designed for your business structure.

For example, Jane Smith is a sole trader designing her own artificial intelligence scripts. Despite overcoming genuine technological uncertainty and improving upon industry baselines in software development, she cannot claim R&D credits.

However, if she incorporates as Smith Software Ltd and continues the same experimental work with proper documentation, she becomes eligible for relief.

Which Scheme Can You Claim Through?

Since April 2024, companies have been able to claim through the new Merged Scheme. This is a requirement for all companies claiming for accounting periods beginning on or after 1 April 2025.

Previously, all companies needed to work out which scheme applied to them, the SME scheme or the RDEC scheme.

If you’re claiming for an accounting period beginning before 1 April 2024, you’ll need to work out which scheme applies to your company structure.

If you qualify as an SME, you should be able to claim under the SME scheme (as you might expect). This is good news as the SME scheme has a more favourable rate.

However, large companies and groups that go beyond the SME thresholds (even if it’s a group of SMEs) must claim through the RDEC scheme. Similarly, SMEs that carry out R&D for a large company.

Making Your R&D Tax Credit Claim

At its heart, the R&D tax credit system is built around Corporation Tax liability. If your business pays Corporation Tax, whether as a limited company, company limited by guarantee, or even as a corporate partner in an LLP, there’s a path to claim relief. If it doesn’t, like in the case of sole traders or most LLPs, you’re out of luck.

The good news is that the system is flexible enough to accommodate different business structures, including groups and not-for-profit companies that generate taxable income. With the new Merged Scheme, the process should also feel more streamlined, even if the underlying rules still require careful navigation.

Looking for more precise advice on how to navigate qualifying for this valuable tax relief? Get in touch with our expert team – we’re always happy to talk R&D tax credits.