UK R&D Tax Relief Under the Merged Scheme: What the 20% Credit and ERIS Are Actually Worth
For accounting periods beginning on or after 1 April 2024 the separate SME and RDEC schemes are gone, replaced by a single merged expenditure credit and a narrow Enhanced R&D Intensive Support route for loss-making SMEs. This explainer sets out the actual rates, the taxable-credit arithmetic, the overseas restrictions and the paperwork that now decides whether a claim is valid at all. It is written for technology, manufacturing and healthcare companies that fund genuine R&D and want the relief to survive HMRC scrutiny.
What actually changed on 1 April 2024
For accounting periods beginning on or after 1 April 2024, the two long-standing R&D reliefs, the SME scheme and the Research and Development Expenditure Credit (RDEC), were replaced by a single merged expenditure credit scheme. Every company, regardless of size, now claims under one set of rules. A separate and much narrower route, Enhanced R&D Intensive Support (ERIS), sits alongside it for loss-making SMEs that spend heavily on R&D. Because the change is tied to when your accounting period begins rather than to a calendar date, some companies with periods straddling 1 April 2024 will still be finishing claims under the old rules while starting the next period under the new ones. The definition of qualifying R&D itself, the requirement to seek an advance in science or technology and resolve genuine scientific or technological uncertainty, has not changed. What changed is the mechanism, the rates, and, decisively, the amount of paperwork that determines whether a claim is even admitted.
The 20% merged credit and what it is genuinely worth
The merged scheme delivers an above-the-line expenditure credit of 20% of qualifying R&D expenditure. The critical point that catches many finance teams out is that this credit is itself taxable: it is treated as trading income and charged to Corporation Tax. So the headline 20% is not the cash you keep. The credit is worked through a payment mechanism, and at the relevant step a notional tax rate is applied. For loss-making companies, and profit-makers whose taxable profits fall below the £50,000 small profits threshold, that notional rate is 19%, giving a net benefit of roughly 16.2p in the pound. For companies paying Corporation Tax at the 25% main rate, the effective net benefit is around 15p in the pound. In plain terms, £100,000 of qualifying spend is worth approximately £15,000 to £16,200 after tax. Any payable element is capped at £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities for the period, with the excess carried forward.
Enhanced R&D Intensive Support for loss-making SMEs
ERIS is deliberately targeted and most companies will not qualify. It is available only to SMEs that are loss-making and R&D-intensive. The intensity test is the gate: for accounting periods beginning on or after 1 April 2024 your relevant R&D expenditure must be at least 30% of total expenditure, taking connected companies into account. That threshold was reduced from the 40% figure that applied earlier, widening the door somewhat. A company that qualifies deducts an additional 86% of its qualifying costs on top of the normal 100%, a 186% total deduction, and can surrender the resulting loss for a payable tax credit worth up to 14.5%. In cash terms this is worth up to around £27 for every £100 of qualifying R&D, materially more generous than the merged credit. A one-year grace period softens the cliff-edge: a company that met the condition and claimed in one year can still qualify the following year even if it dips below 30%, which matters for early-stage healthcare and deep-tech businesses whose spend is lumpy.
Contracted-out and subcontracted R&D
The merged scheme rewrote who may claim when R&D is contracted out, and this is one of the most contested areas in practice. The governing principle is now decision-based: the company that decides to undertake the R&D, and bears the financial risk of it, is generally the one entitled to claim, even where another party physically carries out the work. If your business commissions a contractor to solve a defined scientific or technological problem, you may be able to claim the relief on those payments rather than the contractor. Conversely, where a contractor is simply engaged to deliver an agreed outcome and it is they, not you, who must resolve the uncertainty, the claim may belong to them. This makes the wording of your contracts and the evidence of who directed the R&D a live tax issue. Manufacturers using specialist toolmakers and technology firms outsourcing development work should map each project against the decision-maker rule before assuming the cost qualifies.
The restrictions on overseas expenditure
From the start of the merged regime, expenditure on subcontractors and on externally provided workers is subject to a UK-focused restriction. As a general rule, payments to subcontractors and for externally provided workers only qualify where the underlying activity is undertaken in the United Kingdom. Overseas costs are excluded unless a narrow exception applies: the relief is preserved where the conditions necessary for the R&D are not present in the UK and it would be wholly unreasonable to replicate them here, for example specific geographical, environmental or social conditions, or regulatory and legal requirements that mandate the work take place elsewhere. Cost and availability of workers do not count as qualifying reasons. Companies that have historically relied on offshore development teams or overseas clinical or testing facilities should expect a real reduction in qualifying spend and should model the impact before the period end rather than discovering it at the claim stage. Certain Northern Ireland ERIS claimants have limited relaxations from the overseas contractor and worker restrictions.
Making a claim that survives scrutiny
HMRC has moved decisively from paying first and checking later to checking first. Two procedural requirements now decide validity before the technical merits are even reached. First, from 8 August 2023, every claimant must submit an additional information form before or at the time the claim is filed; without it, HMRC will treat the R&D claim in your Corporation Tax return as invalid and simply remove it. The form requires a project-by-project breakdown, the scientific or technological advance sought, the uncertainties, and a cost analysis. Second, first-time claimants, and any company that has not claimed in the previous three years, must file a claim notification form within six months of the end of the period of account. Miss that window and the claim is lost entirely, regardless of how strong the underlying R&D is. A defensible claim is therefore built during the year, not reconstructed afterwards: contemporaneous records of the uncertainties faced and the competent professionals involved are what stand up when an inspector asks.
What this means for technology, manufacturing and healthcare companies
The reforms reward companies that keep genuine, well-documented R&D onshore and punish those treating the relief as a routine add-back. For technology firms, the decision-maker rule and the overseas restriction together mean contract structure and where development happens now drive the number. For manufacturers, process innovation and materials work still qualify, but subcontracted tooling needs testing against the new contracting rules. For healthcare and life sciences businesses, often loss-making and R&D-intensive by nature, ERIS can be the more valuable route, provided the 30% intensity test and the grace period are actively monitored rather than assumed. The consistent thread is that the relief is no longer a year-end calculation. It is a live position that depends on how contracts are written, where work is done, and whether the evidence is captured as the science happens. This is precisely the kind of continuously moving regulatory surface we review across the year rather than once at filing.
Short FAQ
Can a profitable large company still claim R&D relief under the merged scheme? Yes. The merged scheme is open to companies of all sizes, so a profitable technology or manufacturing group claims the same 20% expenditure credit, with a net benefit of around 15p in the pound after the 25% notional tax restriction. Does ERIS replace the merged scheme for small companies? No. ERIS is an additional, optional route available only to loss-making SMEs that meet the 30% R&D-intensity condition; SMEs that do not meet it claim the standard merged 20% credit instead. What is the single most common reason a valid R&D claim now fails? Procedure rather than substance. The most frequent avoidable failure is a missing additional information form or a late claim notification, either of which renders an otherwise strong claim invalid before HMRC even considers the technical qualification of the work.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.