A relief that can take your corporation tax to nothing, and your credit with it

Figures relate to tax year 2025-26 (UK) · 2025 (US)

A small British company spends money on development and claims relief. The corporation tax bill falls, sometimes to nothing.

For a British owner that is the end of the story. For an American owner it is the beginning of a different one.

Because the foreign tax credit works on British tax actually paid, and a company paying none has nothing to pass up to its owner.

Key takeaways

• Research and development relief cuts UK corporation tax on qualifying spend.
• Loss making companies can surrender losses for a cash credit.
• The schemes merged recently, so older guidance is unreliable.
• Qualifying work must seek an advance in science or technology.
• Routine development and commercial risk do not qualify.
• Cutting British tax reduces the credit available to an American owner.
• The charge on undistributed profits can still apply.
• Claim it anyway, but model the American side before relying on it.

What is research and development relief?

A corporation tax relief for companies resolving genuine scientific or technological uncertainty. Per GOV.UK guidance on the relief, qualifying spend earns an extra deduction, and loss making firms can swap losses for a cash payment. It is one of the best reliefs a small British company can get.

The relief rewards the attempt, not the outcome. A failed project can still qualify.

It will not reward routine product work with no technical uncertainty.

What actually qualifies?

Work that seeks an advance in a field, where a skilled professional could not simply work out the answer. Staff costs, subcontractors within limits, consumables and certain software all count. The test is technical, not commercial. A clever business model does not qualify, however new.

That skilled professional test is where most weak claims fall apart.

Writing the uncertainty down at the time beats any later explanation.

What changed with the merged scheme?

The government merged the small company and large company schemes, keeping a separate route for loss making research intensive firms. Rates and mechanics both changed, and new rules also limit overseas subcontractor costs.

Check the date on anything you read about rates. The figures moved more than once.

The trend has been tighter rules and closer checking throughout.

Can a loss making company get cash?

Yes, which is why this relief matters so much to young firms. A company with losses can swap them for a cash credit rather than carry them forward. That cash often funds the next phase of work, which is the point of it.

The cash credit is itself taxable, which people forget when budgeting.

It also counts as income when you look at the American side.

A worked example

Take an illustrative example. An American founder owns a British software company spending £400,000 a year on development.

The relief cuts her corporation tax to nothing in a good year. In Britain that is an excellent result.

Her American return then looks at the company's profits with no British tax available to credit.

The charge on undistributed profit arrives in full. So a relief that saved tax here created a bill there.

One relief, two consequences

Why does it hurt the American owner?

Because the credit depends on foreign tax you actually paid. A company paying no British corporation tax gives its owner nothing to claim. So the American charge on its profit stands in full. The British saving simply moves across the Atlantic.

Our guide to Form 1116 and the foreign tax credit covers the mechanism.

This pattern repeats with every British relief that cuts tax to nil.

Does the anti-deferral charge apply?

It can, and that is where the sting usually lands. America can tax an owner on company profit whether or not the company pays it out. Where relief has wiped out the British tax, no credit softens that charge.

Our guide to GILTI for UK company owners covers the charge itself.

A high British rate usually protects owners. This relief removes that protection.

Does the check-the-box election help?

Often, because it changes which rules apply. A disregarded company puts the trading result straight onto your own return. That steps around the anti-deferral rules. The relief still cuts British tax, but the American answer is simpler and often kinder.

Our guide to the check-the-box election covers the choice.

Make that election early, because switching later carries its own cost.

Should you still claim the relief?

Almost always. Turning it down means paying British tax to protect a credit you may never use. The sensible move is to claim, then plan the American side around it. Overpaying HMRC on purpose rarely adds up.

Our guide to business asset disposal relief covers the same pattern on a sale.

The one exception is a tight case where every pound of credit counts.

Does America have its own research credit?

It does, though it works differently and covers American work. A US company doing qualifying work can claim a credit against its own tax. Some small firms can set it against payroll. The two do not interact, so British spending feeds no American claim.

Two separate regimes, two separate claims, and no overlap between them.

A group operating in both countries may claim in each on its own spending.

What about overseas subcontractors?

The rules tightened a lot, and costs spent outside the UK now face limits. A British company using developers abroad may find much of that spend falls outside. For groups with teams in several countries, this changed where it pays to do the work.

Our guide to permanent establishment risk covers having people abroad.

Check where the work actually happens before assuming the cost counts.

How closely is it scrutinised?

Far more closely than it once did, after years of weak claims. You now have to send extra information before claiming, and enquiry rates rose sharply. A claim built properly is fine. One built from invoices after the year end is not.

Our guide to an HMRC enquiry for US filers covers what an enquiry involves.

Technical notes written at the time are the best protection there is.

What is the claim deadline?

Two years from the end of the accounting period, and the deadline is hard. Companies that find the relief late often lose the oldest year. Some claimants must also tell HMRC in advance, which catches first timers out.

That advance window is shorter than people expect and easy to miss.

Diarise both dates as soon as a project begins rather than at the year end.

Does it affect the company's accounts?

Yes, and the two schemes present it differently. A cash credit may sit above the tax line as other income rather than as a tax saving. That changes how the accounts read. Lenders and investors notice that difference.

Our guide to running a UK limited company as an American covers the wider position.

Agree the treatment with your accountant before you sign the accounts.

Does it change the value on a sale?

Buyers look closely at claim history during due diligence. Strong claims are an asset. Weak ones turn into a warranty argument. The cash this relief produced may well have funded the growth they are buying.

Our guide to selling a UK business covers the exit.

Keep the technical notes with the company records for exactly this reason.

What records should you keep?

Project notes written at the time, timesheets or a sound split of staff effort, and the costs behind the figures. Those three answer almost everything an enquiry will ask. Rebuilding them two years later is painful and unconvincing.

In our practice the companies that sail through enquiries are the ones that wrote things down.

A short note at the end of each sprint is worth more than a long report afterwards.

Does it interact with the patent box?

They sit alongside each other, and companies often claim both. One cuts tax on the cost of innovating. The other cuts it on the profit from using the result. For an American owner both do the same thing to the credit, which is shrink it.

Claiming both can take the British rate very low indeed.

That is excellent in Britain, and worth modelling carefully in America.

Who can claim research and development relief?

Any UK company doing research and development within the charge to corporation tax, whatever its size or sector. People assume it is only for laboratories and start-ups, but engineering firms, food producers and software houses all claim regularly. What matters is the nature of the work, not the industry it sits in or the size of the company doing it.

Sole traders and partnerships cannot claim, because the relief runs through corporation tax.

That alone is sometimes a reason to incorporate a growing trade.

How much is research and development relief worth?

Research and development relief can change how a small company is funded. A profitable firm sees its corporation tax fall, while a loss making one can take cash out at a set rate on qualifying spend. For a company spending several hundred thousand pounds a year on development, the figure runs well into six figures.

That cash often arrives before the product does, which is exactly the point.

Investors increasingly treat the claim as part of the runway calculation.

What if the claim is wrong?

HMRC can claw the research and development relief back with interest, and penalties follow where the claim was careless or worse. The scrutiny now applied means a weak claim is far more likely to surface than it once was. Agents who work on contingency and promise large figures are worth approaching carefully.

Our guide to reasonable cause penalty relief covers the American parallel.

The company carries the liability, not the adviser who prepared it.

Does it affect your American reporting?

The claim itself does not create a new American form, but it changes the figures on the ones you already file. Company profits, foreign taxes paid and earnings available for distribution all move. So the return looks different even though nothing new has to be filed.

Our guide to Form 5471 categories covers the corporate reporting.

Tell your American preparer about the claim before they start work.

Does the relief change where you should do the work?

It can, now that overseas subcontractor costs face limits. A group with developers split between Britain and elsewhere may find a real difference in the claim depending on where the work happens. That is a commercial decision rather than a purely tax one, but the numbers are large enough to belong in the conversation.

Moving work purely for the relief rarely survives contact with the practical realities of hiring.

Knowing the cost of the split is still better than discovering it at the year end.

How does it sit with grant funding?

Grants interact with the relief and can reduce what you claim, sometimes substantially. Subsidised expenditure has historically been treated differently from unsubsidised spend, and the merged scheme changed how that works again. A company taking innovation grants should model both together rather than assuming they stack.

Check the grant terms before accepting, because the tax cost can exceed the grant itself.

That trade-off is worth running past your accountant at the application stage.

What if you have never claimed before?

Start with the two year window and work backwards, because there may be a year still open. First time claimants also have the advance notification trap to navigate, which applies to some companies and not others. Getting that sequencing right is the difference between a claim and a missed opportunity.

Our guide to company strike off and US tax covers closing a company down.

Most first claims cover a period that has already closed, so check the dates immediately.

Is research and development relief worth the fee?

Usually, provided the adviser charges sensibly and the work genuinely qualifies. Contingency fees of a quarter or more of the benefit were common when the rules were loose, and they look poor value now that claims take more care to prepare. A fixed fee from somebody who will defend the claim is generally the better arrangement.

Ask who answers the enquiry if one arrives, and what that costs.

An adviser who disappears at that point has sold you very little.

How to handle it as an American owner

1. Confirm the research and development genuinely sought a technological advance.
2. Record the uncertainty and the approach while the project runs.
3. Check the advance notification requirement before the deadline.
4. Prepare the claim with the additional information now required.
5. Model the American position with British tax reduced to nil.
6. Consider whether a check-the-box election improves the outcome.
7. Agree the accounting presentation before signing the accounts.
8. Keep the technical narratives permanently for any future sale.

Mistakes and penalties we see with research and development claims

The first is assuming a British relief always improves the overall position for an American owner.

The second is claiming for routine development that carried no genuine technological uncertainty.

The third is missing the advance notification window on a first claim.

The fourth is writing the technical narrative two years later from invoices rather than from project notes.

How US UK Tax Accountants helps

We work with your British adviser on the claim itself and then model what a nil corporation tax bill does to your American return, because those two conversations almost never happen together.

Then we look at whether the structure should change. Our business tax service covers both sides.

If your company claims this relief and you hold an American passport, get in touch before the next claim.

Last reviewed 24 October 2026. This article is general information and not personal tax advice, and the rules here have changed repeatedly.