Guide · Business Tax
UK R&D Tax Relief Explained 2025/26 — Merged Scheme & ERIS
UK Research & Development tax relief was completely restructured for accounting periods beginning on or after 1 April 2024. The old twin-track system — a generous SME scheme alongside RDEC for large companies — has been collapsed into a single Merged Schemegiving a 20% above-the-line taxable credit on qualifying R&D expenditure, with a separate, more generous Enhanced R&D Intensive Support(ERIS) for loss-making SMEs that spend at least 30% of their total expenditure on R&D. The reform also imposed a tough new restriction on overseas subcontracting and tightened the claim administration. This guide walks through how the post-2024 regime works in practice: who qualifies, what costs count, how the cash benefit is calculated, the new Claim Notification rule, and what HMRC is looking for in the wave of compliance checks now under way.
- Merged Scheme: 20% taxable credit on qualifying R&D — net ~15% post-CT for profitable companies.
- ERIS: for loss-making SMEs with R&D ≥ 30% of total spend — net ~27% cash benefit.
- Overseas restriction: subcontracted & EPW work must be done in the UK unless tightly justified.
- Claim Notification: first-time claimants must notify HMRC within 6 months of period end.
- Additional Information Form (AIF): mandatory for every R&D claim since August 2023.
1. The Merged Scheme — what changed in April 2024
For accounting periods beginning on or after 1 April 2024, the historic split between the SME R&D scheme (generous, claimable by small and medium-sized companies) and the R&D Expenditure Credit (RDEC) regime (lower-rate, originally aimed at large companies and grant-funded projects) has been replaced by a single Merged Scheme. Structurally the new scheme follows the old RDEC: qualifying R&D expenditure attracts a 20% credit that is recognised above the operating-profit line, and the credit itself is treated as taxable income.
Because the 20% credit is taxable, the headline rate is not the cash rate. For a profitable company paying Corporation Tax at the 25% main rate, the post-tax benefit is 20% × (1 − 25%) = 15%of qualifying spend. A company in the marginal-relief band sees a slightly higher net rate, and a company in the small-profits 19% rate sees roughly 16.2% net. Loss-making companies that surrender the credit for a cash payment also receive a net ~16.2%, because the notional tax on the credit is applied at 19% under the new rules.
The same scheme now applies to companies of every size — there is no SME / non-SME split for periods in the new regime. Subsidised expenditure, formerly restricted under the SME scheme, is allowable in the Merged Scheme. Subcontractor restrictions, on the other hand, are tighter than before (see section 5).
2. ERIS — Enhanced R&D Intensive Support
Alongside the Merged Scheme runs ERIS, designed to preserve a more generous package for the small, loss-making, research-heavy companies that the original SME scheme was designed to help. ERIS is available where:
- The company qualifies as an SME under the existing definitions (broadly: fewer than 500 staff, turnover ≤ €100m or balance sheet ≤ €86m, including linked and partner enterprises).
- The company is loss-making for the period.
- Qualifying R&D expenditure is at least 30% of total tax-deductible expenditure for the period.
The 30% intensity threshold was lowered from the original 40% as part of the same reform package, broadening access. Mechanically, ERIS preserves the old enhanced SME deduction (an additional 86% on top of normal deductibility) and the 14.5% payable credit on the surrenderable loss. The combined effect is a cash benefit of approximately 27% of qualifying R&D spend— substantially more than the Merged Scheme's ~15%.
Intensity is tested at the company level (or group level where group-aggregation rules apply), so a structurally R&D-heavy startup with modest non-R&D overheads is likely to qualify; a commercially active business with a small R&D function attached typically will not. There is a grace-year rule: a company that qualifies as intensive and then drops just below 30% in the following year can still claim ERIS in that following year.
3. What activities qualify as R&D?
The scientific test is laid down in the DSIT guidelines (the Department for Science, Innovation and Technology — successor to BEIS, which itself replaced earlier departments). The wording is unchanged from previous decades: R&D for tax purposes is work that "seeks to achieve an advance in science or technology" by "resolving scientific or technological uncertainty". The judgement is made from the standpoint of a competent professional working in the relevant field.
What is in scope:
- Developing a new product, process or service whose technological feasibility cannot be readily deduced by a competent professional from existing knowledge.
- Materially improving an existing product, process or service in a way that requires resolving scientific or technological uncertainty.
- Adapting existing technology where the adaptation itself involves technological uncertainty.
- Software engineering involving genuine architectural or algorithmic uncertainty (not configuration, integration or user-interface work).
What is not in scope:
- Commercial innovation that does not involve technological uncertainty (a novel business model is not R&D).
- Market research, product design, aesthetic or stylistic development.
- Routine software, IT or systems integration work.
- Social-science research, economics, pure mathematics.
- Quality control and routine testing of products to standard methods.
A frequent failure point in HMRC enquiries is that "new to us" is not the same as "new to a competent professional". If a competent professional in the field could readily achieve the outcome using publicly available knowledge, there is no qualifying uncertainty — even if the company doing the work did not have the in-house expertise.
4. Qualifying expenditure categories
R&D relief is given on costs falling within defined categories — not on accounting cost in general. The current categories are:
| Category | What's included |
|---|---|
| Staff costs | Gross salary, employer NI, employer pension contributions of employees directly engaged in qualifying R&D. Time apportionment is required. |
| Externally Provided Workers (EPWs) | Agency or staff-provider workers under the control of the claimant. 65% of payments to the staff provider qualify (or 100% for connected-party arrangements made under a special election). |
| Subcontracted R&D | Activities subcontracted to a third party. Subject to the new UK-territoriality test (see section 5). 65% of arm's-length payments qualify. |
| Consumables | Materials transformed or consumed in the R&D process — including the R&D share of light, heat, power and water. |
| Software, data and cloud | Software licences used in R&D, plus data-set licences and cloud-computing costs (added with effect from April 2023). |
| Clinical-trial volunteers | Payments to volunteers participating in clinical trials. |
Capital expenditure, rent, ordinary professional fees and pure marketing spend do not qualify. The R&D Capital Allowances (RDA) regime is a separate 100% first-year allowance on capital assets used in R&D, claimed on the CT600 in the usual way and not via the credit.
5. The new overseas restriction
The single most consequential change in 2024 — and the one most likely to surprise existing claimants — is the new UK-territoriality testapplied to externally provided workers and subcontracted R&D. For periods beginning on or after 1 April 2024, EPW and subcontractor costs only qualify where:
- The work is physically performed in the United Kingdom; or
- The conditions necessary for the R&D are not present in the UK, are present overseas, and it would be wholly unreasonable to replicate them here.
The carve-out is genuinely narrow. HMRC's view, set out in the CIRD manual, is that cost or skills availability is not a sufficient reason. Acceptable reasons are things like deep-sea testing, specific climates (e.g. desert or polar conditions), specialised equipment that exists only in a particular foreign facility, or regulatory clinical trials that must be run in a specific jurisdiction. "Our developers are cheaper in country X" or "we can't recruit fast enough in the UK" will not pass.
Companies that previously relied on offshore development centres or near-shore engineering teams need to revisit their claim profile. In many cases qualifying spend has fallen materially from the prior year on identical activity, simply because of the new geographic restriction.
6. The claim process
Administration tightened significantly in 2023–24. The current process for a new claim is:
- Claim Notification (first-time and lapsed claimants only).If the company has not claimed R&D in the previous three years, it must submit a Claim Notification Form to HMRC within 6 months of the end of the accounting period to which the claim relates. Miss this deadline and the claim is void, regardless of merit.
- Additional Information Form (AIF).Mandatory for every R&D claim since 8 August 2023. The AIF requires a per-project breakdown of qualifying spend, a description of the scientific/technological advance sought, the uncertainties resolved, and named senior R&D contacts. No AIF, no valid claim.
- Amended CT600 + computations.The claim itself sits on an amended CT600, with the R&D credit shown in box 530 (for Merged Scheme) and the corresponding boxes for ERIS where applicable. iXBRL computations should expose the qualifying expenditure breakdown.
- Two-year statutory time limit. The amended return must be filed within 2 years of the end of the relevant accounting period.
7. Worked example
Profitable SME — Merged Scheme
Company spends £200,000 on qualifying R&D, taxed at the 25% Corporation Tax main rate.
Above-the-line credit: £200,000 × 20% = £40,000.
Credit is taxable: £40,000 × 25% = £10,000 of additional CT.
Net benefit: £40,000 − £10,000 = £30,000 (15% of qualifying spend).
Loss-making R&D-intensive SME — ERIS
Same £200,000 qualifying spend, R&D ≥ 30% of total expenditure, company loss-making.
86% additional deduction creates an extra £172,000 of loss available to surrender.
Surrender at 14.5%: £172,000 × 14.5% ≈ £24,940; plus the underlying 100% deduction value if also surrendered.
Combined cash benefit ≈ £54,000 (~27% of qualifying spend).
The headline difference between a profitable Merged-Scheme claim and an ERIS claim on the same spend is therefore close to 2×in cash terms. For genuinely R&D-intensive loss-making startups, qualifying for ERIS is materially more valuable than the headline 20% Merged Scheme rate suggests.
8. HMRC enquiries — why so many?
HMRC's compliance posture changed sharply from 2022 onwards in response to widely reported abuse of the old SME scheme. Volume-driven claims agents had pushed marginal claims, and the error and fraud rate estimated by HMRC was uncomfortably high. The result is a surge of compliance checks — many of them blunt, some of them disproportionate, and almost all of them requiring far more engagement than claimants are used to. The recurring rejection themes are:
- Routine commercial product development presented as R&D, with no identified scientific or technological uncertainty beyond "we hadn't built this before".
- No competent-professional view — the AIF technical narrative is generic, written by a sales-led claims agent, and not validated by anyone with deep expertise in the field.
- Overstated qualifying percentages — staff time allocations that imply impossible R&D intensity, or apportionments without supporting timesheets.
- Lack of contemporaneous evidence — design documents, code commits, lab notebooks or technical write-ups generated long after the period in question.
- Ineligible activity — work on commercial integration, configuration, training data labelling, or pure software bug-fixing claimed as R&D.
Practical defence is straightforward in principle: keep contemporaneous technical records, write the AIF narrative yourself (or with engineering input), and be ready to explain in plain English what the uncertainty was, why a competent professional could not have resolved it from existing knowledge, and what experiments or development you undertook to resolve it.
9. Patent Box — the partner regime
R&D relief sits naturally alongside the Patent Boxregime, which gives an effective 10% Corporation Tax rate on profits attributable to qualifying patented inventions. The two regimes stack: R&D relief on the input (the development spend), Patent Box on the output (profits from the resulting patented technology). For IP-rich businesses — particularly in life sciences, advanced manufacturing and deep tech — combining the two can move the effective rate on innovative profits well below the headline 25% Corporation Tax rate.
Patent Box requires an election (within 2 years of the end of the period in which the profits arise), a qualifying patent granted by the UK or EPO, evidence of qualifying development by the company, and a streaming calculation that allocates profit to the patented invention using the "nexus" mechanism. It is more administratively involved than R&D relief, but for the right business the combined cash impact is substantial.
10. Official references
- CIRD manual — HMRC's technical reference on R&D tax relief (gov.uk).
- Guidelines on the Meaning of R&D for Tax Purposes — DSIT/BEIS guidelines that set the scientific test.
- Claim Notification Form — gov.uk: "Tell HMRC that you're planning to claim R&D tax relief".
- Additional Information Form — gov.uk: "Submit detailed information before you claim R&D tax relief".
- CT600 R&D supplementary pages — included in the standard CT600 from HMRC.
- Finance (No. 2) Act 2023 and Finance Act 2024 — primary legislation enacting the Merged Scheme and ERIS.
Bringing it together
Post-2024, UK R&D tax relief is simpler in headline structure — one Merged Scheme for most companies, with ERIS as a more generous carve-out for loss-making R&D-intensive SMEs — but tougher in detail. The overseas restriction excludes a lot of previously qualifying spend, the AIF and Claim Notification rules turn administrative slips into terminal failures, and HMRC's compliance posture rewards contemporaneous technical documentation in a way that the old regime never required. The economic prize remains real: ~15% of qualifying spend back as net cash for a profitable Merged-Scheme claimant, ~27% for an ERIS claimant. But the case for genuine engineering engagement — not outsourced sales-led claim-writing — has never been stronger.