UK R&D Merged Scheme 2026: RDEC 20% Rate and ERIS for SMEs

The R&D tax relief landscape changed fundamentally from 1 April 2024 when the government merged the long-standing SME R&D scheme and the Research and Development Expenditure Credit (RDEC) into a single unified framework. If your company claims R&D tax relief -- or is considering doing so -- understanding how the merged scheme works is now essential.

From Two Schemes to One: The Merger Explained

Before April 2024, two separate R&D tax relief systems existed side by side. The SME scheme allowed qualifying small and medium companies to deduct 186% of their R&D expenditure (230% for the most intensive claimants) when calculating taxable profit, or to surrender losses for a cash credit. RDEC, available to large companies and SMEs in certain circumstances, provided a taxable above-the-line credit at 20%.

The government merged these into a single framework to simplify the system and reduce fraud, which had grown substantially in the previous years -- particularly in the SME scheme where speculative and fraudulent claims had increased HMRC's compliance burden significantly.

Under the merged scheme, the RDEC mechanics apply to all companies. Qualifying R&D expenditure generates a credit at 20% which is brought into taxable income. The credit offsets corporation tax, with any remaining credit (after first being set against any outstanding tax liabilities) paid out as cash. For most companies paying the main corporation tax rate of 25%, this produces a net benefit of 15% of qualifying R&D expenditure.

ERIS: Enhanced Support for R&D-Intensive SMEs

Recognising that the merger reduced the benefit significantly for the most R&D-intensive small companies (particularly loss-making ones that had relied on the payable credit in the old SME scheme), the government introduced the Enhanced R&D Intensive Support scheme.

ERIS is available to SMEs that are:

• Loss-making for the accounting period, and
• R&D-intensive: qualifying R&D expenditure accounts for at least 30% of total relevant expenditure

For ERIS-eligible companies, the credit rate is 45% rather than 20%. Because the credit is taxable at 25%, the net benefit is 45% x 75% = 33.75% -- though in practice, loss-making companies may benefit from the full 45% as cash if they have no corporation tax to set against.

The effective cash benefit for a loss-making SME with no tax to pay is approximately 27p for every £1 of qualifying R&D spend under ERIS, compared with approximately 15p under the standard merged scheme rate.

What Qualifies as R&D for Tax Purposes

HMRC follows the Department for Business, Innovation and Skills guidelines on what constitutes R&D. The key test is whether the work seeks to achieve an advance in overall knowledge or capability in a field of science or technology by resolving a scientific or technological uncertainty.

This definition has three important components. First, there must be a genuine advance -- not simply applying existing techniques to a new commercial application. Second, the uncertainty must be scientific or technological, not commercial or financial. Third, the advance must be in overall knowledge, not just the company's own knowledge base -- though a company can still qualify if the advance was not publicly known at the time.

Qualifying categories of expenditure under the merged scheme include:

Staff costs: Salaries, wages, employer NI and pension contributions for employees directly engaged in R&D activities. If an employee spends only part of their time on qualifying R&D, only the proportionate cost qualifies.

Externally provided workers (EPWs): Agency workers and similar supplied workers who are not employees. Under the merged scheme, EPWs based overseas are generally excluded (see overseas restriction below).

Subcontractor costs: Third-party contractors engaged to carry out R&D activities. The merged scheme caps the qualifying amount at 65% of the payment to the subcontractor and excludes overseas subcontractors in most cases.

Consumable materials: Items that are transformed, consumed or destroyed during the R&D process. Components that are incorporated into a sellable product do not generally qualify.

Software: Software directly used in carrying out R&D, including cloud computing costs on a pay-as-you-go basis (added from April 2023).

Data licences: The cost of purchasing datasets used to develop or test R&D outcomes (added from April 2023).

Clinical trials volunteers: Payments to individuals participating in clinical trials directly and principally related to R&D.

The Overseas Restriction

One of the most significant changes accompanying the merged scheme is the restriction on overseas expenditure. From April 2024, costs of subcontractors and externally provided workers based outside the UK are generally excluded from qualifying expenditure. Limited exceptions apply where:

• The conditions for the R&D work are not present in the UK (e.g., a specific type of geological environment or clinical population)
• Regulatory approvals require the work to be done in a specific overseas jurisdiction

This change particularly affects technology companies that had relied on lower-cost offshore development teams to carry out qualifying R&D. A company routing qualifying work through an overseas subsidiary or hiring overseas subcontractors will now need to restructure those arrangements to maintain eligibility.

Claim Administration: Notifications and the Additional Information Form

Since April 2023, HMRC has tightened its administrative requirements significantly.

Claim Notification Form: Most companies need to tell HMRC they intend to claim within six months of the accounting period end, before filing the CT600. The exceptions are companies that claimed in any of the three preceding years (they are already "in the system"). New claimants must notify promptly or risk losing the right to claim for that year.

Additional Information Form (AIF): All R&D claims must be accompanied by an online AIF before or alongside the CT600 submission. The AIF requires:

• A description of each R&D project (or group of projects)
• The qualifying costs split by category
• The name and contact details of a senior company officer who approved the claim

HMRC uses the AIF information for risk assessment and fraud prevention. Vague project descriptions that simply describe the end product without explaining the scientific or technological uncertainty being resolved are likely to trigger a compliance check.

Common Pitfalls in Merged Scheme Claims

Routine development work: Writing software to the client's specification, building standard e-commerce features, or adapting existing frameworks without resolving a specific technical uncertainty does not qualify. The work must go beyond what a competent professional in the field could achieve with current knowledge.

Inflated staff percentages: HMRC scrutinises claims where very high proportions of senior salaries are attributed to R&D. Project timesheets and contemporaneous records are essential.

Subcontractor structures: Payments to connected companies require particular care. The qualifying amount is limited to the lower of the payment made or the connected company's own qualifying expenditure on the project.

Grant interaction: Where R&D has been subsidised by a notified state aid grant, the rules on what can be claimed need careful review. Under the merged scheme, the treatment of subsidised expenditure differs from the old SME scheme.

The merged scheme simplifies the legal framework but does not reduce the need for rigorous documentation. Companies should maintain project records, staff time allocations and technical justifications contemporaneously -- not reconstructed at the end of the year when a claim is being prepared.