R&D Tax Credits for SMEs UK 2026/27: How to Claim the Merged Scheme

Research and Development (R&D) tax relief is one of the most generous incentives available to UK companies, yet many eligible businesses fail to claim. The scheme was overhauled from April 2024, consolidating the old SME scheme and RDEC into a single merged scheme. Understanding how the new rules work -- and who can still access the higher SME rate via the Enhanced R&D Intensive Support (ERIS) -- is essential for any company doing innovation work in 2026/27.

What Changed in April 2024?

Prior to April 2024, there were two separate R&D relief schemes: the SME scheme (which gave qualifying companies an enhanced deduction of 186% -- later reduced -- on qualifying costs) and RDEC (Research and Development Expenditure Credit), primarily used by larger companies.

From accounting periods beginning on or after 1 April 2024, the two schemes merged into a single RDEC-style regime. Most companies now claim the same 20% above-the-line credit rate. The practical effect is simpler to calculate and easier to audit, but the headline rate is lower than the old SME enhanced deduction for profitable companies.

The Merged Scheme: How It Works

Under the merged scheme, a company calculates its qualifying R&D expenditure and applies a 20% credit. This credit is above-the-line -- it appears as a taxable income item in the accounts -- which means it improves reported profitability (unlike the old enhanced deduction, which reduced taxable profit below the line).

The credit is then offset against the corporation tax liability. Any excess credit is repayable, subject to a cap linked to PAYE and NI liabilities. The effective net benefit after corporation tax is approximately 15p for every GBP 1 of qualifying R&D spend for a profitable company paying the 25% corporation tax rate, or around 16.2p at the 19% small company rate.

For a company spending GBP 200,000 on qualifying R&D:

• Credit: GBP 200,000 x 20% = GBP 40,000
• Less corporation tax on the credit at 25%: GBP 10,000
• Net benefit: GBP 30,000

Enhanced R&D Intensive Support (ERIS): The Higher Rate

Loss-making companies that are R&D intensive -- meaning their qualifying R&D expenditure is at least 30% of total expenditure -- can claim ERIS rather than the standard merged scheme. ERIS provides a 27% credit rate rather than 20%.

For an R&D-intensive loss-making company, the effective net cash benefit under ERIS (after the corporation tax notional charge) is approximately 20.4p per GBP 1 of qualifying spend. This is the closest successor to the generous old SME scheme and is targeted specifically at early-stage, research-heavy businesses.

If your company is loss-making and spends heavily on R&D relative to its total costs, check whether you meet the 30% intensity threshold before defaulting to the standard merged scheme.

What Qualifies as R&D?

R&D for tax purposes has a specific definition. HMRC follows the BEIS guidelines, which require that the work is a systematic investigation or research to achieve an advance in overall knowledge or capability in a field of science or technology. Crucially, it must involve resolving scientific or technological uncertainty -- meaning it was not something that a competent professional in the field could readily deduce.

Qualifying activities can include:

• Developing new software, algorithms or processes
• Creating new or improved products or materials
• Solving technical problems in manufacturing or production
• Developing new uses for existing technologies

Activities that do not qualify include routine testing, quality control, social science or economic research, and the reproduction of existing products with only aesthetic changes.

From August 2023, costs of work contracted out overseas are generally no longer qualifying costs. R&D must be performed in the UK to be included in a claim under the merged scheme, with limited exceptions.

Qualifying Costs

The main categories of qualifying expenditure are:

• Staffing costs: salaries, employer NI (15% above GBP 5,000 for 2026/27), employer pension contributions for staff directly engaged in R&D
• Consumables: materials, utilities and software directly used in the R&D process
• Software licences: where the software is directly used in carrying out R&D
• Externally provided workers: agency staff performing R&D, subject to a 65% cap on the cost
• Contracted-out R&D: costs paid to unconnected third parties carrying out qualifying R&D on your behalf (65% cap)
• Clinical trial volunteers: payments to participants in qualifying clinical trials

Capital expenditure (for example, equipment) does not qualify for R&D relief, though it may attract an Annual Investment Allowance separately.

Documentation and HMRC Compliance

HMRC has significantly increased its scrutiny of R&D claims. A claim submitted without adequate documentation is highly likely to be challenged or rejected. You should prepare a contemporaneous technical narrative explaining:

• The scientific or technological uncertainty being addressed
• How the work involved systematic investigation
• Why the solution was not readily deducible

This narrative should be written by the technical staff involved in the R&D, not solely by an accountant or R&D specialist. HMRC has made clear that poorly evidenced claims are a key compliance risk area.

You must also submit an Additional Information Form (AIF) as part of the R&D claim process. This became mandatory in August 2023 and must be submitted before or at the same time as the company tax return.

Timing and How to Claim

R&D relief is claimed via the company's Corporation Tax return (CT600). The claim must be made within 2 years of the end of the accounting period to which it relates. You cannot make a standalone R&D claim outside the CT return process.

Use the CalcHub corporation tax calculator to model your overall corporation tax position alongside your R&D credit:

Corporation Tax Calculator -- CalcHub