R&D Tax Credits UK 2026/27 -- SME and Merged Scheme Explained

What counts as R&D for HMRC?

HMRC's R&D regime is built around the concept of "technological uncertainty". A project qualifies as R&D if it seeks to make an advance in overall knowledge or capability in a field of science or technology by attempting to resolve uncertainty that competent professionals in the field cannot readily resolve using existing knowledge.

Three tests must all be met:

• Advance in science or technology: the project must be trying to push forward what is known in the field -- not just what the company knows.
• Scientific or technological uncertainty: there must be genuine doubt about whether the goal is achievable or what approach will work. If experts in the field could look it up or apply known techniques, it is not uncertain.
• Systematic investigation: the work must be carried out through a defined process of investigation or experimentation, not just trial and error.

Social science, arts, humanities and commercial innovation that does not involve science or technology do not qualify. Developing a new marketing strategy is not R&D. Building a genuinely novel compiler optimisation technique may well be.

The merged scheme: structure and rates

The merged scheme applies to accounting periods beginning on or after 1 April 2024. It replaces both the old SME R&D relief (130% enhanced deduction, 65% payable credit) and RDEC (Research and Development Expenditure Credit, 13% rising to 20% for larger companies).

Under the merged scheme, for every £100 of qualifying R&D expenditure:

• The company receives an additional 20% deduction -- so £100 of R&D spend generates £120 of Corporation Tax deductions (the £100 itself plus the extra £20).
• For profitable companies at 25% CT, this saves £5 in CT per £100 of R&D (20% x 25%).
• For loss-making companies, the excess loss can generate a 20% payable credit: £100 of R&D spend yields up to £20 of cash from HMRC.

The credit is "above the line" -- it is included as taxable income in the company's accounts but then credited against the CT liability. This makes R&D relief more visible in management accounts than the old SME below-the-line deduction.

ERIS: Enhanced R&D Intensive Support

ERIS (formerly marketed as "SME Intensive" and now formalised under the merged scheme) provides a higher 45% payable credit for SMEs that are both loss-making and R&D-intensive.

To qualify for ERIS:

• The company must be an SME: fewer than 500 employees, and either annual turnover under £100 million or total balance sheet under £86 million (EU-derived thresholds).
• The company must be loss-making for the relevant accounting period.
• Qualifying R&D expenditure must be at least 30% of total expenditure for the period.

For a deep-tech startup spending £500,000 out of £600,000 total costs on R&D (83% intensity), ERIS delivers a cash payment of 45% x £500,000 = £225,000, versus the standard 20% credit of £100,000. The difference (£125,000) can be critical for cash-constrained pre-revenue companies.

Qualifying expenditure: what can you claim?

The merged scheme uses a broadly similar list of qualifying costs to the predecessor schemes:

• Staff costs: salaries, employer NI, employer pension contributions for employees directly and actively engaged in R&D. Management and indirect staff time may qualify in part but must be evidenced by genuine time records.
• Externally Provided Workers (EPWs): staff from staffing agencies engaged to perform R&D. From April 2024, these must generally be UK-based to qualify.
• Subcontracted R&D: payments to unconnected third parties to perform R&D on behalf of the company -- 65% of the cost qualifies. From April 2024, the work must generally be UK-based.
• Consumables: materials and utilities used and consumed in the R&D process.
• Software: software used directly in carrying out R&D.
• Cloud computing: cloud computing costs for storage or computation used directly in R&D (qualifying since April 2023).
• Data licences: costs of acquiring data that are used directly in R&D activities (qualifying since April 2023).

Costs that do not qualify include: land acquisition, capital expenditure generally (though AIA/FYA applies separately), production and distribution costs, clinical trial costs for drug development (separate relief exists), and the cost of acquiring patents or licences.

The pre-notification requirement

From August 2023, companies that are making their first R&D claim or have not submitted a claim in the previous 3 accounting periods must submit a pre-notificationto HMRC at least 6 months before the end of the accounting period to which the claim will relate.

The pre-notification is submitted online via HMRC's R&D notification form. It requires basic information about the company and a high-level description of the R&D being undertaken. Failure to pre-notify in time is a hard stop -- the claim is invalid and cannot be submitted. There is no appeal process or late-filing relief. Companies returning to R&D claiming after a gap should diarise the pre-notification deadline as soon as the R&D project begins.

All R&D claimants must also submit an Additional Information Form alongside the Corporation Tax return. This form requires a technical description of each R&D project, the qualifying costs breakdown and details of the responsible officer who has reviewed the claim.

Worked example: merged scheme claim 2026/27

AI and software R&D: HMRC's position

With the rise of AI development as a major industry activity, HMRC has clarified its position. Merely using AI tools (e.g. GitHub Copilot, ChatGPT) to assist with software development does not make that development into R&D -- the tool removes some of the uncertainty, rather than the company resolving it through its own investigation. However, companies that are actively advancing the state of AI itself -- developing novel model architectures, training techniques for new domains, or novel interpretability methods -- can qualify provided the standard technological uncertainty test is met.

A company building a proprietary large language model from scratch, resolving genuine uncertainty about training stability on new data types, likely qualifies. A company using an existing model via an API to build a customer service chatbot almost certainly does not.

HMRC compliance and anti-abuse

HMRC's R&D Connect teams have substantially increased scrutiny since 2022. Key risk areas:

• Overclaimed staff time: including management, HR or sales time that was not directly engaged in R&D.
• Non-qualifying software: including off-the-shelf commercial software licenses as "software used in R&D" when the software itself is not the R&D.
• Overseas contractors: claiming overseas subcontractor or EPW costs under the merged scheme without meeting the geographic necessity conditions.
• Connected-party rates: claiming 100% of payments to connected subcontractors rather than the allowable 65%.
• Routine development: claiming iterative software improvements as R&D without identifying specific technological uncertainties.

HMRC can raise an enquiry into an R&D claim within 12 months of the return being submitted. If fraud or negligence is involved, there is no time limit. Companies should retain contemporaneous R&D project records, time-tracking data and technical justification documents for at least 6 years after the relevant accounting period.