UK companies that spend money on genuine research and development can claim tax relief, but since April 2024 the rules have run through two schemes rather than the old SME and large-company routes. This article explains what each scheme offers, who it suits, and the procedural steps that decide whether a claim survives.
Why did the R&D reliefs change?
For many years, smaller companies and larger ones claimed under separate regimes. According to GOV.UK guidance, the merged R&D expenditure credit (RDEC) scheme and enhanced R&D intensive support (ERIS) now apply to accounting periods beginning on or after 1 April 2024. They replace the earlier arrangements.
For founders, the practical result is that a single question comes first: is the company a loss-making business whose spending is dominated by research, or is it something else? The answer determines which scheme is the natural fit, and the two are priced very differently.
What does the merged RDEC scheme offer?
The merged scheme is the default route. GOV.UK states that “the rate of R&D expenditure credit under the merged RDEC scheme is 20%”. The credit is not a cash grant sitting outside the tax system: the guidance says it is “liable to Corporation Tax as it is classed as trading income”.
To qualify, a company must be trading, chargeable to Corporation Tax and running a project that meets the R&D definition. GOV.UK notes that some overseas expenditure is restricted.
There is also a ceiling linked to payroll. The credit cannot exceed £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities for the period, unless an exemption applies. Under RDEC, any excess is carried forward rather than lost.
That cap matters for young companies with few employees. A business with £30,000 of relevant PAYE and NIC liabilities, for example, faces a cap of £20,000 + (3 × £30,000) = £110,000 (illustrative arithmetic).
What is enhanced R&D intensive support?
ERIS is aimed at a narrower group. According to GOV.UK, the company must be a loss-making R&D intensive small or medium-sized enterprise. Two tests apply:
- Loss-making: the company has a trading loss for tax purposes before the additional deduction.
- R&D intensive: relevant R&D expenditure is “at least 30% of its total expenditure”, and the calculation includes spending by connected companies.
If both are met, the company can claim an extra 86% deduction on top of the usual 100%, making “a total of 186% deduction”. It can also claim a payable tax credit that is not liable to tax and is “worth up to 14.5% of the surrenderable loss”.
The government’s own wording is careful, and it is worth being equally careful. The 14.5% is a ceiling, not a promise: the amount depends on the size of the surrenderable loss.
Which scheme is better for a given company?
GOV.UK confirms that a company can choose to claim under the merged RDEC scheme even if it qualifies for ERIS, but cannot claim under both for the same expenditure. That choice is real, and the answer is not always obvious.
| Feature | Merged RDEC | ERIS |
|---|---|---|
| Headline figure | 20% expenditure credit | Extra 86% deduction (186% in total) plus payable credit of up to 14.5% of surrenderable loss |
| Tax treatment of credit | Taxable as trading income | Payable credit not liable to tax |
| Who it suits | Trading companies with qualifying R&D | Loss-making SMEs with R&D at least 30% of total spend |
| Payroll cap | £20,000 plus 300% of PAYE and NIC | Not described on the guidance page |
A comparison depends on a company’s tax position, its cost mix and its losses. That is the point at which an accountant who handles R&D claims regularly earns the fee. This article does not attempt to say which route is better for any company.
A worked example: testing the 30% threshold
The figures below are illustrative arithmetic, not a forecast.
Suppose a software start-up spends £1,000,000 in a year, of which £400,000 is relevant R&D expenditure.
- Intensity: £400,000 ÷ £1,000,000 = 40%, which clears the 30% test.
- Extra deduction at 86%: 0.86 × £400,000 = £344,000.
- Total deduction at 186%: 1.86 × £400,000 = £744,000, which is the original £400,000 plus the £344,000 uplift.
If the same company spent £1,000,000 but only £250,000 was relevant R&D, the intensity would be 25% and ERIS would not be available.
Now suppose, for illustration only, that the surrenderable loss were £700,000. A payable credit at the maximum rate of 14.5% would be £700,000 × 0.145 = £101,500. The actual figure depends on the loss calculated under the rules, which can differ from a simple spending total.
By comparison, under merged RDEC the same £400,000 of qualifying expenditure would produce a credit of £400,000 × 0.20 = £80,000, which is taxable as trading income.
What counts as R&D, and what does not?
Qualifying is not a matter of calling something innovative. The guidance requires a project that meets the R&D definition, and the definition is technical: broadly, work to resolve scientific or technological uncertainty, not routine development or marketing. The page reviewed here does not list qualifying cost categories in detail, so founders should work from HMRC’s full R&D guidance rather than from assumption.
Total expenditure for the 30% test is built from costs brought into account under accounting standards, certain pre-trading costs and amounts deducted under specific Corporation Tax Act provisions. It excludes payments to connected companies. That makes group structures a trap: a start-up that routes development costs through a related company can alter its own intensity ratio.
Which procedural steps can invalidate a claim?
Two administrative requirements deserve more attention than the rates, because failing either one can end the claim.
The claim notification
GOV.UK guidance says companies must notify HMRC in advance if they are claiming for the first time, or if their last claim was made more than three years before the last date of the notification period. The notification period “starts on the first day of the period of account and ends 6 months after the period of account ends”. The guidance is blunt about the consequence of missing it: “your R&D tax relief claim will be invalid.”
The form must be completed by a company representative or an agent acting for the company. Companies that have claimed within three years of the end of their notification period generally do not need to send one, with exceptions where HMRC previously rejected a claim or where an earlier claim for a pre-April 2023 period was made by amendment on or after 1 April 2023.
The additional information form
HMRC’s manual explains that supporting information must be supplied through the additional information form on or before the date the claim is made, for claims made on or after 8 August 2023. It must be submitted at least once for each accounting period with an R&D claim. The manual states: “If the required information is not provided, the claim is invalid.”
Answers also need to be self-contained. According to the manual, it is not acceptable to refer to documents held outside the form, even if HMRC already holds them, and unsatisfactory answers on projects can lead to rejection. Incomplete responses increase the likelihood of an enquiry.
How does R&D relief fit with the rest of a funding plan?
R&D relief does not replace outside capital, but it can shorten the gap between spending and the next funding round. In a market where investors are more selective, as discussed in how founders are adapting to a tougher funding market, recovering part of the cost of development can extend runway.
It also interacts with other founder tools. Investors in early-stage companies often rely on the reliefs described in how EIS and VCTs work after the April 2026 changes, while staff incentives are covered in EMI share options after the 2026 expansion. A company building technology with a very small team, as described in the rise of the solo founder, may find that the payroll cap on RDEC bites sooner than for a larger team, because the cap is tied to PAYE and NIC liabilities.
Reading the scheme as a planning discipline
The central lesson is that R&D relief rewards records and timing as much as invention. The rates are set out clearly: 20% under merged RDEC and up to 14.5% payable credit under ERIS with the enhanced deduction. But a missed notification or an incomplete form can undo the benefit entirely.
Founders weighing a first claim should therefore check three things early: whether the project meets the R&D definition, whether a notification is due within six months of the period end, and whether the 30% intensity test points to ERIS or to the merged scheme. Decisions on which route to use, and how to document the work, belong with a qualified adviser who can see the company’s accounts.
This article is general information, not personalised financial or tax advice. Rules, thresholds and rates change, so check current guidance or speak to a qualified adviser.
Sources: GOV.UK; HMRC
