R&D Tax Credits for SMEs After the 2023 Reform (2026 Update)

R&D tax credits remain one of the most generous and underused reliefs in the UK tax system. But the April 2023 reforms — which merged the previously separate SME R&D Relief and Research and Development Expenditure Credit (RDEC) schemes — have substantially changed how most companies claim. If you have not reviewed your approach since April 2024, now is the time.

The Pre-Reform Position (For Context)

Before April 2023, there were two schemes:

• SME R&D Relief: enhanced deduction of 186% (later 230%) on qualifying expenditure; payable credit for loss-making SMEs at 14.5% (later reduced to 10%)
• RDEC (R&D Expenditure Credit): above-the-line credit at 13% (later 20%) for large companies and SMEs working on contracted or subsidised R&D

The two-scheme structure created complexity and compliance costs. HMRC also documented significant levels of fraudulent or erroneous claims, particularly from SME claimants using unscrupulous R&D consultancies working on a contingency fee basis.

The 2023 Reform: A Merged Scheme

The Autumn Statement 2022 announced a merger, implemented for accounting periods beginning on or after 1 April 2024.

The Merged Scheme (RDEC 2.0)

For most companies — including SMEs — the merged scheme applies:

• Credit rate: 20% of qualifying R&D expenditure
• Above the line: the credit is included in your profit and loss account as taxable income, then 25% corporation tax is deducted, leaving an effective net benefit of 15p per £1 of qualifying R&D spend for a profitable company paying the main rate

Example: Company spends £200,000 on qualifying R&D.

• R&D credit: £200,000 × 20% = £40,000 (above the line — reduces corporation tax base)
• Corporation tax on £40,000 credit: £40,000 × 25% = £10,000
• Net benefit: £40,000 − £10,000 = £30,000 (15% effective rate)

For companies in the 19% band, the net benefit is slightly higher: £40,000 − £7,600 = £32,400 (16.2% effective rate).

Payable Credit for Loss-Making Companies

If the merged scheme credit exceeds your corporation tax liability, the excess is payable (as a cash refund from HMRC) subject to a PAYE/NIC cap — the payable credit cannot exceed 3× your PAYE and NIC costs in the period. This prevents abuse through artificial salary arrangements.

ERIS: The Preserved SME-Equivalent for Intensive Cases

For SMEs that spend heavily on R&D relative to their overall costs, the government preserved a more generous scheme: Enhanced R&D Intensive Support (ERIS).

Eligibility for ERIS

To qualify for ERIS, you must be an SME (under EU definition: fewer than 500 employees, turnover under €100m, balance sheet under €86m) AND:

• Your qualifying R&D expenditure is at least 30% of your total expenditure for the accounting period

The 30% threshold was reduced from 40% (which applied in the transitional 2023/24 period) to 30% from 1 April 2024.

ERIS Rate

ERIS provides a payable credit of 27p for every £1 of qualifying R&D spend.

Example: R&D-intensive SME spends £500,000 on qualifying R&D in a loss-making year.

• ERIS credit: £500,000 × 27% = £135,000 payable from HMRC
• This can be received even if the company has no corporation tax liability

Compare this to the merged scheme net benefit of 15p/£1 for a profitable company — ERIS is significantly more generous for qualifying intensive SMEs.

What Does "Total Expenditure" Include?

Total expenditure for the 30% test includes all costs that appear in the company's profit and loss account:

• Staff costs
• Materials and consumables
• Contractors (subject to the connected-party rules)
• Software
• Overheads

It does not include capital expenditure in the period.

Qualifying R&D Activities

The definition of qualifying R&D is unchanged by the reform. It is based on the BEIS Guidelines (which draw on HMRC's CT manual):

Must involve: work that seeks to achieve an advance in science or technology (not just in the company's knowledge) by resolving scientific or technological uncertainty — where a competent professional in the field could not readily resolve the uncertainty from existing publicly available information.

Qualifying Categories

• Directly qualifying R&D: staffing, consumables, software, utilities, and (with restrictions) external contractor costs
• Qualifying indirect activities: quality control testing, training in support of R&D, maintenance of R&D equipment

What Is Excluded

• Social sciences: economics, management studies, market research
• Arts, humanities, and design where no technological challenge is involved
• Routine development: adapting existing technology without resolving uncertainty (e.g., building a website using standard frameworks)
• Mathematical methods per se (though applying mathematics to solve a technological problem may qualify)

A common mistake is conflating "technical" with "technological." Writing complex SQL queries or configuring software tools is technical but is not necessarily R&D unless it involves resolving genuine technological uncertainty.

Qualifying Expenditure: Categories and Caps

Staffing Costs

Employee costs for time spent on qualifying R&D: salary, NI, pension contributions. Must be supported by time-tracking records.

Subcontractor and Externally Provided Worker Costs

Post-April 2024, the merged scheme limits subcontractor R&D costs to work performed in the UK, with some exceptions:

• Overseas costs permitted where the work is necessary due to geography (e.g., testing in specific natural environments) or regulatory requirements
• The 65% cap on subcontractor costs (vs 100% for own staff) has been removed under the merged scheme, but connected-party restrictions apply

Software and Consumables

Software used directly in carrying out the R&D: licences, cloud computing costs, data storage. Must be used exclusively (or apportioned) for R&D.

Consumables and materials that are transformed or consumed in the R&D process: chemicals, electronic components, 3D printing materials.

The Advance Notification Requirement

This is the most operationally significant change from the reform and has caught many companies out.

For accounting periods beginning on or after 1 April 2023, any company wishing to make an R&D claim must submit a Claim Notification Form via HMRC's online portal within six months of the end of the accounting period.

Who Must Notify

• New claimants (never claimed R&D before)
• Companies that have not claimed R&D in the previous three accounting periods

Existing regular claimants (who claimed in at least one of the previous three years) are also required to notify, but HMRC has indicated it is primarily focused on ensuring new and returning claimants notify.

Consequences of Late Notification

Miss the six-month window? The claim cannot be made for that period — full stop. There is no HMRC discretion on this point.

What the Notification Includes

The Claim Notification is not the full R&D claim — it is a lightweight preliminary notice. It includes:

• Company name and UTR
• Period of account
• A brief description of the R&D activities
• The name and contact details of the main R&D contact

The full technical narrative, financial figures, and supporting documentation are submitted as part of the corporation tax return (CT600) and Additional Information Form.

The Additional Information Form

From August 2023, all R&D claims must be accompanied by an Additional Information Form (AIF) submitted online before or alongside the CT600. The AIF requires:

• Description of each project (what scientific/technological uncertainty was being resolved)
• Expenditure breakdown by category
• Details of the main qualifying person within the company
• Agent details if an external R&D adviser is involved

HMRC uses the AIF to risk-assess claims before processing.

Anti-Avoidance: R&D Adviser Scrutiny

HMRC has significantly increased scrutiny of R&D claims prepared by third-party advisers, particularly those operating on a contingency basis. If your claim is prepared by an adviser who:

• Takes a percentage of the credit as their fee
• Has not asked to see underlying technical documentation
• Has not spoken to your development or engineering team

…consider whether their approach is robust enough to withstand an HMRC enquiry. An HMRC investigation into an R&D claim can result in the full credit being withdrawn plus penalties and interest. Use a qualified tax adviser (ICAEW, CIOT member) with genuine R&D experience.

Summary: 2026 R&D Checklist