UK businesses spent £46.7 billion on qualifying R&D in the 2022-23 tax year, and the cleantech sector accounted for a growing share. Yet the number of claimants has dropped sharply. By 2023-24, total claims had fallen 26% to £46,950, with qualifying expenditure dipping to £46.1 billion. R&D tax relief for cleantech and circular economy businesses should be straightforward, given that most are built on innovation. The gap between qualifying activity and actual claims represents real money left unclaimed.

The relief system changed in April 2024 when the previous SME and RDEC schemes were replaced by a single merged credit. For cleantech businesses, particularly those that are pre-revenue or loss-making, the new rules increase the cash benefit in some cases and reduce it in others.

How the merged R&D scheme works

From 1 April 2024, the previous SME and RDEC schemes were replaced by a single merged R&D expenditure credit. The merged scheme applies to all companies regardless of size, with one alternative route for qualifying small and medium-sized businesses.

The headline rate is a 20% above-the-line credit on qualifying R&D expenditure. After corporation tax, this delivers a net benefit of approximately 15% for profitable companies paying the main 25% rate. For loss-making companies, the notional tax rate applied is 19%, producing an effective benefit of 16.2%. In practical terms, a cleantech business spending £500,000 on qualifying R&D could receive a tax benefit of up to £81,000. For most founders, that appears as a direct cash payment from HMRC, typically arriving six to nine months after the accounting period ends.

Above-the-line treatment matters for businesses seeking investment. The credit appears as income in the profit and loss account, improving the reported financial position. For companies preparing investor decks or applying for grant funding, this visibility matters.

Enhanced support for R&D-intensive businesses

The merged scheme includes an alternative route that is relevant to many cleantech businesses. Enhanced R&D Intensive Support (ERIS) is available to loss-making SMEs where qualifying R&D expenditure accounts for 30% or more of total expenditure.

ERIS provides a 186% enhanced deduction on qualifying costs and access to a 14.5% cash credit on surrenderable losses. The effective benefit can reach 27% of qualifying spend. For a pre-revenue cleantech company spending heavily on developing a novel recycling process or a new synthetic fuel technology, that 27% is cash the business can use to extend its runway before the next raise.

There is a one-year grace period built into the rules. If a company meets the 30% intensity threshold and claims ERIS in one year but falls below the threshold the following year, it can still claim ERIS for that second year. This protects businesses whose R&D intensity fluctuates as they move towards commercialisation.

Companies eligible for ERIS can choose to claim under the standard merged scheme instead if that produces a better result, but cannot claim under both for the same expenditure. Model both options before submitting.

What qualifies for R&D tax relief in cleantech

The qualifying criteria have not changed with the merged scheme. A project qualifies if it seeks to achieve an advance in overall knowledge or capability in a field of science or technology by resolving scientific or technological uncertainty. The advance must be one that a competent professional in the field could not readily work out.

For cleantech and circular economy businesses, qualifying activities often include work that founders do not immediately recognise as R&D in the tax sense. Examples include:

• Novel chemical or electrochemical processes for producing synthetic fuels or recovering materials from waste streams.
• New mechanical or thermal processes for recycling lithium-ion batteries or other complex materials.
• Machine learning models that classify and audit construction waste or optimise material flows .
• Prototype production equipment where existing off-the-shelf technology cannot achieve the required output, purity, or efficiency.
• Adapting known processes to work at commercial scale when the scaling itself introduces uncertainties that cannot be resolved by standard engineering practice.

The test is not whether the outcome is successful. Projects that fail to achieve their technical objective can still qualify, provided the company was genuinely attempting to resolve an uncertainty. For cleantech businesses working with unproven processes or scaling novel technology for the first time, failed experiments are a normal part of the R&D cycle.

The grant funding change

The rule change with the biggest practical impact for cleantech businesses came with the removal of the subsidised expenditure rules from April 2024. Under the old SME scheme, R&D funded by a grant or subsidy was treated differently and often had to be claimed under the less generous RDEC scheme instead.

That restriction no longer applies. Grant-funded R&D is now eligible for relief under both the merged scheme and ERIS, on the same terms as any other qualifying expenditure. A cleantech business receiving a £200,000 Innovate UK grant towards a qualifying R&D project can now claim R&D tax relief on the full cost of the project, including the grant-funded portion.

Businesses in the circular economy that previously excluded grant-funded costs from their claims may not realise they can now include them.

Qualifying costs

The types of expenditure that qualify for R&D relief remain broadly the same under the merged scheme. These include:

• Staff costs: salaries, employer National Insurance contributions, and employer pension contributions for employees directly and actively engaged in qualifying R&D.
• Subcontractor costs: payments to third parties for R&D work, subject to a 65% restriction where the subcontractor is not connected to the company. The subcontractor must be paid through the UK PAYE system for externally provided workers.
• Consumable materials: items used up or transformed in the R&D process.
• Software and data licences used in qualifying R&D.
• Cloud computing costs attributable to R&D activities.
• Utilities: a proportion of heat, light, and power used in R&D.

Capital expenditure on plant and machinery used in R&D does not qualify for the R&D expenditure credit. There is a separate 100% Research and Development Allowance for capital spend, which works through the capital allowances system rather than the R&D relief scheme.

The PAYE/NIC cap

Payable credits under the merged scheme are capped at £20,000 plus three times the company’s annual PAYE and National Insurance contributions. This cap limits the cash benefit for companies with very small teams, heavy reliance on subcontractors, or founders who pay themselves minimal salaries.

For early-stage cleantech businesses with two or three employees and significant subcontracted R&D, the cap can materially reduce the cash benefit. It is worth factoring this into financial planning and considering whether the team structure affects the claim outcome.

HMRC scrutiny and compliance

R&D claims are subject to increasing scrutiny. The number of HMRC enquiries has risen substantially, and the introduction of the Additional Information Form in August 2023 means every claim must now include a description of the R&D projects, the uncertainties being resolved, and how the work advances science or technology.

For cleantech businesses, the technical narrative matters most. A claim that describes “developing a new recycling process” without explaining what was scientifically or technologically uncertain, what approaches were tried, and why the outcome was not readily deducible will attract questions. The strongest claims are built on contemporaneous records: monthly logs of project aims, the uncertainties encountered, the approaches taken, and the staff time allocated.

Companies that have never claimed before must submit a claim notification form to HMRC within six months of the end of their accounting period. Missing this deadline means the claim cannot be made. For a company with a March year-end, the notification must be submitted by the end of September.

Relief is also restricted for R&D work carried out outside the UK from April 2024. Limited exceptions exist where the work cannot reasonably be done in the UK due to geographic, environmental, or regulatory conditions, but the bar is high. Any overseas R&D costs included in a claim need clear justification and documentation.

From May 2026, all tax advisers who submit R&D claims on behalf of clients must be registered with HMRC. Cleantech businesses using external consultants for their claims should confirm their adviser’s registration status. HMRC is also piloting a targeted Advance Assurance service for SMEs from Spring 2026, allowing businesses to seek upfront guidance on whether specific aspects of their projects qualify before submitting a claim.

What to do before your next R&D claim

Before submitting, run through this checklist.

1. Keep project records as you go. A short monthly note covering what you were trying to achieve, what uncertainty you faced, what you tried, and what happened takes minutes to write and saves hours at claim time. It also provides the evidence HMRC expects if they open an enquiry.
2. Separate R&D costs from operational costs. Where cleantech R&D and production activities overlap, unclear cost allocation leads to under-claimed relief or HMRC challenge. A simple time-tracking system and dedicated cost codes solve this from day one.
3. Track your R&D intensity. If your company is loss-making and spending heavily on R&D, monitor the 30% threshold through the year. Qualifying for ERIS means up to 27% effective relief, and losing eligibility mid-year narrows your options.
4. Review grant-funded projects. If you have previously excluded grant-funded costs from your R&D claims, revisit your position. The subsidised expenditure rules were removed from April 2024, and you may be able to claim on expenditure you previously could not.
5. Engage your accountant early. R&D tax credit claims interact with capital allowances, grant accounting, and corporation tax planning. An accountant with experience in cleantech R&D can identify qualifying activities that a generalist would miss and structure claims to withstand HMRC scrutiny.

Frequently asked questions

Can my cleantech business claim R&D tax relief if we receive grant funding?
Yes. From April 2024, the subsidised expenditure rules were removed. R&D funded by grants, including Innovate UK grants, is now eligible for relief under both the merged scheme and ERIS on the same basis as any other qualifying expenditure.

What is the difference between the merged scheme and ERIS?
The merged scheme provides a 20% credit (net benefit of 15-16.2%) and is available to all companies. ERIS is an alternative for loss-making SMEs that spend 30% or more of their total expenditure on qualifying R&D. ERIS offers a higher effective benefit of up to 27%. You can claim under one or the other for a given period, not both.

Do I need to notify HMRC before making a claim?
If your company has not claimed R&D tax relief before, or has not claimed in the previous three years, you must submit a claim notification form within six months of the end of your accounting period. Missing this deadline prevents you from claiming.

Does capital expenditure on R&D equipment qualify?
Capital expenditure on plant and machinery used in R&D does not qualify for the R&D expenditure credit. There is a separate 100% Research and Development Allowance for capital R&D spend, which works through the capital allowances system. Your accountant should ensure both routes are being used where applicable.

How Wilson Partners can help

Wilson Partners’ Tax team works with cleantech and circular economy businesses on R&D claims across areas such as synthetic fuels, materials recovery, battery recycling, and sustainability software. We bring together commercial insight and specialist R&D tax expertise to build claims that stand up to HMRC scrutiny. If you are unsure whether your business is claiming correctly, or at all, get in touch.