UK R&D Tax Credits Guide 2026/27

History: Old Schemes to Merged Scheme

UK R&D tax relief has existed since 2000. Before April 2024, there were two parallel schemes:

• SME scheme: SMEs (fewer than 500 employees, turnover below €100m) could claim an enhanced deduction of 86% on qualifying R&D costs (post-April 2023 reform; previously higher), plus a 10% credit if loss-making ("surrender" credit). For a profitable SME at the 25% CT rate, the effective benefit was approximately 21.5%.
• RDEC: Large companies and those excluded from the SME scheme claimed a 20% above-the-line credit (post-April 2023 reform). Effective benefit approximately 15% net of CT.

From accounting periods beginning on or after 1 April 2024, the dual-scheme system was replaced by the single merged scheme (broadly following the RDEC structure) for most companies. The transition aimed to simplify the regime and reduce fraud-driven distortions in the SME scheme.

The Merged Scheme -- 20% RDEC

The merged scheme applies to all companies (SMEs and large companies) for accounting periods beginning on or after 1 April 2024. Key features:

• Rate: 20% above-the-line credit on qualifying R&D expenditure.
• Above-the-line treatment: the credit is included in pre-tax profits and appears as income in the P&L, increasing the company's CT profit before the credit is set against the CT liability. This improves the visibility of R&D investment in accounts.
• Set-off order: first against CT liability, then surrenderable for cash (payable credit) where CT is insufficient.
• Effective net benefit: at the 25% main CT rate, the effective net benefit is 20% x (1 - 25%) = 15% of qualifying R&D expenditure.
• Subsidised/grant-funded costs: costs met by a grant or subsidy are excluded from the R&D claim (to prevent double-subsidy).

The merged scheme applies regardless of company size, replacing the previous SME/large company distinction for most purposes. Companies working on R&D under contract for another party (contracted R&D) follow specific rules on who can claim the relief.

ERIS -- 40% for R&D-Intensive SMEs

Enhanced R&D Intensive Support (ERIS) is a separate, higher-rate credit available to qualifying R&D-intensive SMEs. ERIS replaces the former "loss-making SME enhanced credit" as protection for genuinely innovation-focused early-stage companies.

To qualify for ERIS, the company must:

1. Be an SME (fewer than 500 employees; turnover below €100m or balance sheet below €86m).
2. Have qualifying R&D expenditure equal to at least 30% of total expenditure in the accounting period (the R&D intensity test).

The ERIS credit rate is 40% above the line (vs 20% for the standard merged scheme). For a loss-making ERIS-qualifying startup with no CT liability, the full 40% can be surrendered for a payable credit (subject to the PAYE cap).

ERIS is particularly important for pre-revenue pharmaceutical, biotech, deep-tech and software startups where R&D is the primary activity. A company spending £1m on qualifying R&D with 40% ERIS could receive a cash credit of up to £400,000 per year, representing a meaningful funding contribution at early stages.

Qualifying R&D Activities

R&D for tax purposes is defined by reference to the DTI/DSIT guidelines. The key criteria:

• Advance in science or technology: the project must seek to advance overall knowledge or capability in a field of science or technology -- not merely the company's own knowledge or a commercial application of known technology.
• Genuine technological uncertainty: there must be a genuine uncertainty at the start of the project -- a problem for which no solution is known to a competent professional in the field. If the answer is readily available from published literature or an off-the-shelf product, there is no technological uncertainty.
• Systematic investigation: the work must involve a systematic investigation -- not just trial and error or empirical tinkering.

Activities that typically qualify: novel software architecture overcoming proven technical limitations; drug candidate development; advanced materials research; medical device innovation; novel manufacturing process development; artificial intelligence/ML addressing genuine computational uncertainty. Activities that do not qualify: routine software development following established techniques; cosmetic product reformulation; market research; financial product innovation without technological content.

Qualifying R&D Costs

Qualifying expenditure under the merged scheme:

• Staff costs: gross salaries, employer NI and employer pension contributions for employees directly and actively engaged in R&D. Supervisory staff can qualify proportionally. Staff performing support functions (HR, finance, admin not related to R&D) do not qualify.
• Consumables and materials: materials and consumables transformed or consumed in the R&D process. Stock and materials retained after the project are excluded.
• Software: software licences and software costs directly attributable to R&D. General business software (accounting, HR) does not qualify.
• Externally provided workers (EPW): agency or labour-hire workers engaged in R&D. Qualifying amount is capped at 65% of the payment to the labour provider.
• Subcontractors (unconnected): payments to unconnected third parties carrying out R&D. Qualifying amount capped at 65% of the payment. Connected subcontractors: qualifying amount is the lower of arm's-length price or actual cost.
• Utilities: power, water, fuel directly used in R&D activities. Apportionment required for shared utilities.
• Payments to clinical trial volunteers: qualifying in the pharmaceutical/medical device context.

Capital expenditure (equipment, buildings, land) does not qualify for R&D credits -- it is relieved through capital allowances instead. Interest, rent and general overhead not directly attributable to R&D do not qualify.

PAYE Cap on Payable Credits

For loss-making companies seeking a cash payable credit (where CT liability is less than the R&D credit), the payable credit is capped at:

£20,000 + (300% x total PAYE and NICs for R&D-related employees)

This cap prevents companies from generating large artificial payable credits through offshore workforce structures or other arrangements where the UK PAYE contribution is minimal relative to the claimed R&D activity. For genuine R&D businesses with significant UK-based R&D staff, the PAYE cap is rarely binding -- the 300% multiplier means a company paying £100,000 PAYE/NIC for R&D staff can receive a payable credit of up to £320,000.

Companies where the PAYE cap is likely to bite include those using predominantly overseas staff or subcontractors for R&D, or companies with very high R&D expenditure relative to their UK payroll. Restructuring to ensure sufficient UK employee engagement in R&D can unlock higher payable credits.

Advance Notification Requirement

From 1 April 2023, companies making an R&D claim for the first time (or that have not made an R&D claim in the 3 preceding tax years) must submit an advance notification to HMRC before or within 6 months of the end of the accounting period to which the R&D claim relates.

The advance notification is submitted via an online form and requires:

• Company name and UTR (Unique Tax Reference)
• The accounting period the claim will relate to
• Confirmation that the company is aware of the R&D relief scheme
• Contact details for the company's R&D point of contact

Failure to submit the advance notification within 6 months of period end means the R&D claim cannot be made for that period. There is no discretion or late relief -- the deadline is hard. Existing claimants (who claimed in at least one of the 3 prior years) do not need to re-notify. Companies uncertain about their status should notify promptly and advise their R&D specialist accountant to check the notification status for each upcoming accounting period.

Additional Information Form (AIF)

From 8 August 2023, every R&D claim must be accompanied by an Additional Information Form (AIF) submitted to HMRC. The AIF must be submitted before or at the same time as the CT600 R&D claim. Claims without an AIF are rejected.

The AIF requires:

• A description of each R&D project being claimed, including the technological uncertainty being resolved
• The qualifying cost breakdown by category (staff, software, subcontractors, EPW, consumables, utilities)
• The name and tax agent reference of any R&D specialist adviser involved in preparing the claim
• Contact details for the company's responsible officer (director or named officer)

HMRC uses AIF data to risk-score claims and identify those requiring compliance checks. The AIF requirement has significantly increased the administration of R&D claims but has reduced fraudulent and inflated claims. R&D specialist advisers who prepare claims must be named on the AIF -- HMRC tracks advisers with patterns of inflated or non-qualifying claims.

How to Claim via CT600

R&D relief is claimed via the company's CT600 Corporation Tax return:

1. Submit the Additional Information Form (AIF) via the HMRC AIF online service.
2. Complete the R&D section of the CT600 (supplementary pages CT600L for RDEC/merged scheme, CT600(ERIS) for ERIS claims).
3. Enter the qualifying R&D expenditure by category.
4. HMRC calculates the credit (20% or 40% for ERIS) and applies it against CT liability. Surplus surrendered for payable credit if applicable.
5. The CT600 must be filed within 12 months of the accounting period end. R&D claims can be made retrospectively for up to 2 years after the period end (within the CT600 amendment window).

Most R&D claims are prepared by specialist R&D tax advisers or accountants with R&D expertise. HMRC has increased compliance checks significantly since 2023 -- robust technical documentation and accurate cost analysis are essential. The AIF and advance notification requirements make DIY R&D claims more complex and the risk of rejection or enquiry is higher without specialist support.

Worked Example

Company A: profitable software company, accounting period ending 31 March 2027. Qualifying R&D costs: £300,000 (£200,000 staff, £50,000 software, £50,000 unconnected subcontractor payments). Not ERIS-qualifying (R&D is 18% of total expenditure).

• Subcontractor qualifying costs: 65% x £50,000 = £32,500
• Total qualifying R&D expenditure: £200,000 + £50,000 + £32,500 = £282,500
• Merged scheme credit (20%): £282,500 x 20% = £56,500
• CT on £56,500 credit (25% main rate): £14,125
• Net benefit: £56,500 - £14,125 = £42,375 (approximately 15% of £282,500)

Company B: ERIS-qualifying pharmaceutical startup, same period. Qualifying R&D costs: £500,000 (entirely staff and consumables). R&D is 65% of total expenditure. Loss-making -- no CT liability. PAYE/NIC for R&D employees: £120,000.

• ERIS credit (40%): £500,000 x 40% = £200,000
• CT liability: £0 (loss-making)
• PAYE cap: £20,000 + (300% x £120,000) = £20,000 + £360,000 = £380,000
• Payable credit (capped at lower of credit and PAYE cap): £200,000
• Cash received: £200,000 -- a 40% cash return on qualifying R&D spend