R&D tax credits allow UK limited companies to reduce their Corporation Tax bill — or receive a cash credit — based on qualifying research and development expenditure. Following HMRC's merger of the SME and RDEC schemes from 1 April 2024, the rules have changed significantly. This article explains the current position clearly.
The Merged Scheme: What Changed from April 2024
Before April 2024, there were two separate R&D relief schemes: the SME scheme and the Research and Development Expenditure Credit (RDEC) for large companies. From 1 April 2024, these merged into a single scheme — the Merged RDEC Scheme — which applies to most companies.
The key exception is a new scheme for R&D-intensive SMEs — the ERIS — which provides higher relief for qualifying businesses.
The Merged Scheme: Rates and How It Works
The merged scheme provides a 20% above-the-line credit on qualifying R&D expenditure. This credit appears as income in your profit and loss account before tax.
| Company Status | Credit Rate | Net Benefit (after CT at 25%) |
|---|---|---|
| Profit-making company | 20% | Approximately 15% of qualifying spend |
| Loss-making company | 20% | Approximately 16.2% of qualifying spend |
How the credit works in practice
If your company spends £100,000 on qualifying R&D:
- You receive a 20% above-the-line credit: £20,000
- This credit is added to your taxable income
- Corporation Tax at 25% on the £20,000 credit: £5,000
- Net benefit: £20,000 – £5,000 = £15,000
The credit is used first to offset your Corporation Tax liability. Any surplus credit is payable to you as a cash refund — even if your company is loss-making.
ERIS: The R&D Intensive SME Scheme
The Enhanced R&D Intensive Support (ERIS) scheme provides higher relief for qualifying SMEs that are both loss-making and R&D-intensive — that is, they spend at least 30% of their total costs on qualifying R&D.
| Factor | ERIS Rate |
|---|---|
| Above-the-line credit rate | 27% |
| Net benefit (loss-making) | Approximately 21.5% of qualifying spend |
| Minimum R&D intensity required | 30% of total costs |
| Eligibility | SMEs only, must be loss-making |
If your company is a start-up or early-stage business spending the majority of its costs on R&D, ERIS may apply to you and the benefit is significantly higher than the merged scheme.
What Qualifies as R&D for Tax Purposes?
HMRC's definition of qualifying R&D is based on the BEIS guidelines and is broader than many business owners realise. R&D for tax purposes means work that seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty.
This does not mean academic research. Commercial product development, software development, and process improvement can all qualify — provided they involve genuine uncertainty about whether something is technically achievable.
Qualifying costs include:
- Staff costs (salaries, NIC, pension contributions) of employees directly engaged in R&D
- Subcontractor costs (at 65% of the cost for the merged scheme)
- Software licences used in R&D activities
- Consumables — materials and utilities used and transformed during R&D
- Payments to clinical trial volunteers
What does not qualify:
- Capital expenditure (equipment and machinery — though the equipment may qualify for capital allowances separately)
- The routine production of goods or services
- Market research and social sciences
- Overseas R&D costs (significantly restricted from April 2024, with limited exceptions)
Pre-Notification: A New Requirement
From 1 April 2023, companies making an R&D claim for the first time — or that have not claimed in the previous three years — must notify HMRC of their intention to claim within six months of the end of the accounting period. Missing this notification deadline means you cannot make a claim for that period.
If you think you may have qualifying R&D expenditure, notify HMRC within six months of your accounting period end. You can always decide not to claim later — but you cannot claim if you missed the notification window.
How to Document Your Claim
HMRC scrutinises R&D claims carefully and has significantly increased compliance activity in recent years. Good documentation is essential:
- A technical narrative explaining what scientific or technological advance was sought and what uncertainties existed
- Evidence of the uncertainty — records of testing, iteration, failures, and the expertise required to attempt the work
- Clear identification of the qualifying costs and how they were allocated to the R&D activity
- Timesheets or other records showing staff time spent on R&D vs other activities
Claims submitted without adequate documentation are increasingly being challenged and rejected. HMRC can also open an enquiry into prior years' claims if they suspect overclaiming.
Retrospective Claims: How Far Back Can You Go?
You can make an R&D claim by amending your Corporation Tax return within two years of the end of the accounting period. If you have qualifying R&D in prior periods and have not claimed, you can still do so — provided you are within this window.
See HMRC's guidance on R&D relief for Corporation Tax.
General information only. This article provides general guidance on UK tax and accounting matters and reflects our understanding of legislation and HMRC guidance at the time of publication. Tax rules, rates, and thresholds change frequently. Nothing in this article constitutes personalised tax or financial advice. Always seek advice specific to your circumstances from a qualified accountant before taking action. Ledgertech Accountants Ltd accepts no liability for any loss arising from reliance on this content.
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