This page costs out a single claim in full: £400,000 of qualifying expenditure, an £80,000 expenditure credit, £20,000 of corporation tax charged on that credit, and £60,000 of net benefit, or 15p per £1 spent. It follows the money from the cost categories in the ledger through to the boxes on the CT600L. Example Structures Ltd is invented and every figure here is illustrative.
The company’s accounting period runs from 1 April 2025 to 31 March 2026, so the merged R&D Expenditure Credit applies, as it does for all accounting periods beginning on or after 1 April 2024. The company is profitable, has no associated companies, and has augmented profits well above £250,000, so it pays corporation tax at the 25% main rate. Enhanced R&D Intensive Support is for loss-making SMEs and so does not arise.
The R&D behind the figures
Example Structures Ltd is a structural engineering company working on building envelopes and load-bearing connections, so this is a claim arising from building work. During the period the company worked on a moment-resisting connection between a steel frame and a unitised facade. The baseline is what published structural engineering practice could achieve for a connection detail of that kind. The advance sought is an improvement in what the field can do, not in what this company can do. The uncertainty is technological: whether the detail could be made to perform under combined thermal movement and wind loading, and how, could not be readily resolved by a competent professional working from existing knowledge. The resolution was an instrumented test programme. That framing is the subject of what counts as qualifying R&D. Everything below is arithmetic.
What did the company spend, and how much of it qualifies?
| Cost category | Amount in the accounts | Qualifying element |
|---|---|---|
| Staffing costs, apportioned to the R&D | £236,000 | £236,000 |
| Externally provided workers, unconnected provider, UK PAYE and Class 1 NIC | £40,000 | £26,000 |
| Contractor payments, unconnected, R&D undertaken in the UK | £120,000 | £78,000 |
| Consumable items | £48,000 | £48,000 |
| Software, data licences and cloud computing | £12,000 | £12,000 |
| Total qualifying expenditure | £400,000 |
Two lines do not enter the claim at the figure in the ledger. Payments to unconnected subcontractors qualify at 65% of the relevant portion under CTA 2009 s1136, and staff provision payments to unconnected providers of externally provided workers are restricted on the same basis under s1131(2), which takes 65% of so much of the payment as is attributable to the workers’ qualifying earnings (defined at s1132A): £40,000 x 65% = £26,000 on the externally provided workers (s1131), and £120,000 x 65% = £78,000 on the contractor payments (s1136). So £56,000 of real cash spent on the programme never reaches the claim.
Both restrictions sit on top of a location test, and the location test is the one that decides whether the line appears at all. Externally provided workers count only where they are subject to UK PAYE and Class 1 NIC. Contractor payments count only where the R&D is undertaken in the UK. Fail either and the whole line drops out, not 35% of it. The remaining three categories enter in full, subject to the usual apportionment and consumption questions set out in which costs qualify.
What is the claim worth?
Trading profit for the period, after deducting the R&D costs themselves, is £900,000.
| Step | Figure |
|---|---|
| Qualifying R&D expenditure | £400,000 |
| Expenditure credit at 20% (s1042G) | £80,000 |
| Trading profit before the credit | £900,000 |
| Taxable total profits, credit included as income | £980,000 |
| Corporation tax at the 25% main rate | £245,000 |
| Credit set against that liability at step 1 (s1042I) | £80,000 |
| Corporation tax payable | £165,000 |
| Position | Corporation tax payable |
|---|---|
| No claim: tax on £900,000 at 25% | £225,000 |
| With the claim | £165,000 |
| Net benefit | £60,000, or 15p per £1 of qualifying spend |
The tax bill falls by £60,000 rather than £80,000 because the credit is itself taxable income. It goes into taxable total profits, raising them from £900,000 to £980,000, and £80,000 taxed at 25% is the missing £20,000.
Does the notional tax step apply here?
No, and the reason is worth setting out, because the notional tax deduction is the part of the merged scheme most often misapplied to profitable companies.
The seven steps in s1042I run in order. Step 1 applies the credit in discharging the corporation tax liability for the period. Here that liability, £245,000, comfortably exceeds the credit of £80,000, so the whole credit is absorbed at step 1 and nothing passes to step 2. The notional tax deduction at s1042K therefore never engages for this company. Steps 3 to 7 are not reached either, so the PAYE cap, which limits the cash payable to £20,000 plus 300% of relevant PAYE and National Insurance contributions, does nothing, and no cash is paid. The benefit arrives entirely as a smaller tax bill.
None of that means the credit escapes tax. The £20,000 above is a real corporation tax charge on real taxable income, arrived at through the computation rather than through the payment steps. The 20p headline is worth 15p because of that charge, not because of a notional one.
Had the company’s corporation tax liability been smaller than the credit, a balance would have passed to step 2, where s1042K deducts the amount, if any, by which that balance exceeds the credit less the notional tax charge on it. That charge is computed on the initial amount of the credit, not on the balance: at the main rate where the company has profits chargeable at the main rate, and at the 19% small profits rate in any other case, a loss-maker included. That is why a loss-making company under the same scheme keeps 16.2p per £1 rather than 15p.
The credit in the accounts
The £80,000 is recognised above the line as other operating income, before the tax charge, so it increases pre-tax profit as well as reducing the tax bill. Boards, lenders and investors see it in operating performance rather than buried in the tax note. The FRS 102 mechanics, including which period the income belongs in, are set out in accounting for the merged credit.
How does the claim appear on the CT600 and CT600L?
Boxes 650, 656 and 657 on the CT600 are ticked. Box 650 records the company as an SME claimant, which describes the company’s size, not the scheme it claims under; a merged-scheme claim by an SME still ticks it. Box 656 confirms the claim notification requirement was met, where one applied. Box 657 confirms the Additional Information Form. Boxes 659 and 660 stay blank: merged-scheme expenditure belongs in neither.
| CT600L box | Entry |
|---|---|
| L10, qualifying expenditure | £400,000 |
| L15, the expenditure credit | £80,000 |
| L25, total credit | £80,000 |
| L30, corporation tax liability, from box 475 | £245,000 |
| L35, income tax deducted, from box 515 | nil |
| L40, maximum set-off | £245,000 |
| L45, step 1 amount, the lower of L40 and L25 | £80,000 |
| L195, set against the liability on this return | £80,000 |
| L210, carried to box 530 | £80,000 |
| L125 and box 880, payable credit | nil |
The two nils matter as much as the figures. A profitable company with a liability larger than its credit produces no payable credit at all, and a return showing one has gone wrong somewhere in the steps. Our page on entering the claim on the CT600 and CT600L follows the boxes down the form.
What the Additional Information Form carries
The Additional Information Form is filed separately, and it must reach HMRC before or with the CT600, never after. For this claim it would carry:
- company details: unique taxpayer reference, employer PAYE reference number, VAT registration number, and business type or SIC code;
- the senior internal R&D contact, and every agent involved in the claim;
- the accounting period start and end dates, which must match those on the Company Tax Return;
- qualifying expenditure by category, matching the inputs table above, with the portion of each category attributable to qualifying indirect activities identified separately;
- the number of projects, and the project descriptions themselves.
What changes the answer
Four variables move this result, and none of them is the rate.
- The small profits rate. The same £80,000 credit taxed at 19% leaves £64,800, or 16.2p per £1.
- The marginal relief band. Augmented profits between £50,000 and £250,000 carry a 26.5% marginal rate, being the 25% main rate plus the standard marginal relief fraction of 3/200, so the credit is worth 14.7p per £1. The limits are divided by one plus the number of associated companies under CTA 2010 s18D, and the credit is taxable income, so it moves augmented profits itself.
- Overseas contractors. Had the £120,000 of contractor work been undertaken outside the UK without meeting the qualifying overseas expenditure conditions, £78,000 would drop out of the claim, taking £15,600 off the gross credit and £11,700 off the net benefit. The narrow conditions are in overseas R&D.
- The contract said something different. If Example Structures Ltd had been the contractor on that £120,000 of work rather than the customer, the analysis changes sides. Under CTA 2009 s1133(2)(c), the customer claims only where it is reasonable to assume, having regard to the terms of the contract and any surrounding circumstances, that the customer intended or contemplated when entering into the contract that research and development of that sort would be undertaken. Otherwise the contractor claims in its own right, for the same work, on the same facts. See contracted-out R&D: who claims?
Talk it through with a chartered adviser
The arithmetic on this page is the easy half. The £400,000 at the top of it is the product of judgements about which activities qualify, how staff time is apportioned, what a contract actually says about who intended the R&D, and which costs were consumed rather than capitalised. Those judgements are what an HMRC compliance officer reads.
Making those judgements and standing behind them is the regulated part of the job: a chartered adviser signs off every claim this firm prepares before it reaches HMRC.
For an estimate on your own figures, use the claim value calculator. The other cases in this library, including a loss-maker and an ERIS claim, are indexed in the worked examples, and the wider R&D tax relief guide sets out the rules behind them. If you want a considered view on your own position, get in touch.
Sources
- CTA 2009 s1042G — the relevant percentage: 20%, other than for a ring fence trade.
- CTA 2009 s1042H — the expenditure credit brought into account as a receipt in calculating the profits of the trade.
- CTA 2009 s1042I — the seven steps, with step 1 discharging the corporation tax liability for the period.
- CTA 2009 s1042K — the notional tax deduction at step 2, at the main rate where the company has profits chargeable at the main rate and otherwise at the small profits rate.
- CTA 2009 s1131 — subsection (2), qualifying expenditure on externally provided workers where the parties are not all connected: 65% of so much of the staff provision payment as is attributable to qualifying earnings.
- CTA 2009 s1132A — what qualifying earnings are: earnings on which PAYE and Class 1 NIC are accounted for in respect of any part of them, and otherwise earnings attributable to R&D undertaken outside the UK to which section 1138A applies.
- CTA 2009 s1136 — the qualifying element of a contractor payment: 65% of the relevant portion.
- CTA 2010 s18D — the £50,000 lower limit and £250,000 upper limit, divided by one plus the number of associated companies.
- Corporation Tax rates and allowances — the 25% main rate, the 19% small profits rate and the standard marginal relief fraction of 3/200.
- CIRD112100: the payment steps — HMRC’s walk-through of the seven steps.
- Completing the CT600L — the box numbers used above.
- Merged scheme and ERIS guidance — the 20% credit and the schemes in force for accounting periods beginning on or after 1 April 2024.
CIRD112100 is indexed on our CIRD reference index, with HMRC’s own title for it, a line on what it says and the date HMRC last revised it.