UK R&D Tax Credits: The Merged Scheme & ERIS Explained (2025/26)

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UK R&D tax credits reward companies that invest in innovation, but the scheme changed fundamentally in April 2024. This guide explains the merged RDEC scheme, the enhanced support for R&D-intensive SMEs (ERIS), what counts as qualifying R&D, the new compliance requirements, and how to make a robust claim that survives HMRC scrutiny.

What is R&D tax relief and who can claim it?

R&D tax relief lets companies reduce their corporation tax bill, or receive a cash credit, for money spent on qualifying research and development. It’s designed to reward innovation — resolving scientific or technological uncertainty — and is open to companies of all sizes across many sectors, not just laboratories or tech firms. Manufacturing, software, engineering and food companies all commonly qualify.

The relief exists because R&D produces benefits beyond the individual company, so the government subsidises it to encourage more investment. To claim, your project must seek an advance in science or technology by overcoming uncertainty that a competent professional couldn’t easily resolve. Routine work, or simply applying existing techniques, doesn’t qualify — the bar is genuine technological advancement.

What changed in the April 2024 merged scheme?

For accounting periods beginning on or after 1 April 2024, the old separate SME and RDEC schemes were combined into a single merged scheme. It provides a 20% above-the-line R&D expenditure credit, which after corporation tax gives a net benefit of around 15% for main-rate companies and up to 16.2% for those on the small profits rate.

This was a significant cut for SMEs, who previously enjoyed more generous relief, and a boost for larger companies whose RDEC rate rose. The merger simplified the system into one set of rules for most claimants, though it left important nuances around subcontracting and overseas costs. Companies that claimed comfortably under the old SME scheme should expect a lower benefit and review their claims carefully.

What is Enhanced R&D Intensive Support (ERIS)?

ERIS is a more generous route for loss-making SMEs that are R&D-intensive — meaning qualifying R&D is at least 30% of total expenditure, a threshold lowered from 40%. Eligible companies can receive an effective net benefit of up to 27% on their R&D spend, significantly more than the merged scheme, recognising the value of supporting unprofitable but innovative small firms.

A one-year grace period protects companies that temporarily dip below the 30% threshold, preventing a sudden loss of relief. You can choose to claim under the merged scheme instead of ERIS if it suits you better, but not both for the same expenditure. For a loss-making, research-heavy startup, ERIS can be the difference between viable and unviable cash flow.

What costs qualify for R&D relief?

Qualifying R&D expenditure includes staff costs for those working on the project, a proportion of subcontractor and externally provided worker costs, consumables like materials and utilities used up in R&D, software, and certain data and cloud computing costs. The expenditure must relate directly to resolving the scientific or technological uncertainty at the heart of the project.

A major recent change restricts relief for overseas subcontractors and externally provided workers where the R&D is carried out abroad, pushing companies to keep qualifying activity in the UK. Identifying exactly which costs qualify — and apportioning mixed costs correctly — is where much of the skill in an R&D claim lies, and getting it wrong in either direction creates risk.

What are the new R&D compliance requirements?

HMRC has tightened R&D compliance considerably in response to widespread error and fraud. Claims now require an Additional Information Form submitted before the corporation tax return, detailing the projects, the qualifying costs and the technological advances sought. Many claims also need to be notified to HMRC in advance through a claim notification, depending on the company’s history.

HMRC scrutiny has risen sharply, with more enquiries and a tougher stance on weak claims. This makes a well-documented, technically sound claim essential — vague descriptions or inflated costs now invite challenge, penalties and repayment. The era of casual R&D claims is over, and companies should treat the relief as a serious technical submission requiring proper evidence.

What is the PAYE cap on R&D credits?

To prevent abuse, the payable R&D credit a company can receive is capped at £20,000 plus 300% of its total PAYE and National Insurance liabilities for the period. This links the cash benefit to genuine UK employment, stopping companies with little real activity from extracting large credits. Any credit above the cap is generally carried forward rather than paid out.

For most genuine R&D companies with employed staff, the cap is not a problem, but it can constrain very early-stage businesses with high R&D spend and few employees. Understanding the cap is part of forecasting the actual cash a claim will deliver, which matters for startups relying on the credit as a funding source.

A practical example: an SME R&D claim

Imagine a software company spending £200,000 on qualifying R&D — developer salaries, cloud costs and consumables — in a period under the merged scheme. The 20% expenditure credit gives a headline £40,000, which after corporation tax produces a net benefit of around £30,000, reducing the company’s tax bill or, if loss-making, generating a cash payment up to the PAYE cap.

If that same company were loss-making and R&D-intensive, ERIS could lift the net benefit substantially higher. The example shows why scheme choice and accurate cost identification matter so much: the same £200,000 of spend can deliver markedly different benefits depending on the company’s profile and how well the claim is constructed and evidenced.

How to make a strong R&D claim

A robust claim starts with correctly identifying qualifying projects and costs, then documenting the technological uncertainty and advance in language HMRC accepts, completing the Additional Information Form, and ensuring the figures are defensible. Many companies use specialist R&D advisers, though the rise in spurious claims means choosing a reputable one matters more than ever.

The relief remains valuable for genuinely innovative companies, but the bar for a successful claim has risen. Treating R&D relief as a technical, evidence-based submission — rather than an easy windfall — is now essential. Done properly, it provides meaningful funding for innovation; done carelessly, it invites an HMRC enquiry that can cost far more than the relief is worth.

What counts as qualifying R&D activity?

The technical heart of any claim is whether the work seeks an advance in science or technology by resolving uncertainty that a competent professional couldn’t readily overcome. This is broader than people assume — developing new software architectures, improving manufacturing processes, or creating novel materials can all qualify, while routine development using known methods does not.

The key is the uncertainty: if the outcome was readily deducible by a skilled person, it isn’t R&D. Documenting what the technological challenge was, why it wasn’t obvious, and how the company sought to overcome it is the evidence HMRC now demands. Companies that articulate this clearly succeed; those that describe routine commercial work as R&D increasingly fail under the tighter scrutiny.

How should I choose an R&D adviser?

The surge in spurious R&D claims has made adviser choice critical. Reputable specialists focus on the technical and financial substance of a claim, work with your technical staff to document the science, and only claim what genuinely qualifies. Less scrupulous firms that promise large refunds on weak claims expose you to enquiry, repayment and penalties — the liability rests with the company, not the adviser.

Good signs include a rigorous qualification process, willingness to decline marginal claims, transparent fees, and proper engagement with the technological-advance test rather than a tick-box approach. Because HMRC now scrutinises claims hard, a thorough adviser who builds a defensible claim is worth far more than one who maximises the headline figure at the cost of compliance risk.

How R&D relief supports business growth

For genuinely innovative companies, R&D relief is a meaningful source of funding that can be reinvested in further development. A successful claim either cuts the corporation tax bill or, for loss-makers, generates cash — money that can fund hiring, equipment or the next project. Used well, the relief creates a virtuous cycle of innovation and reinvestment.

The key is to treat it as a serious, well-evidenced part of financial planning rather than an afterthought. Identifying qualifying activity as it happens, documenting the technological challenges throughout the year, and building a robust claim turns R&D relief into reliable funding. For research-driven businesses, this discipline can materially accelerate growth while keeping the company firmly on the right side of HMRC’s tighter rules.

Common R&D claim mistakes to avoid

The frequent failures are claiming for routine work that doesn’t meet the advance-and-uncertainty test, overstating qualifying costs, missing the Additional Information Form or claim notification, and including overseas costs that no longer qualify. Each can turn an expected refund into an enquiry, repayment and penalty under HMRC’s tougher stance.

Avoiding them means qualifying projects honestly, documenting the science and the spend rigorously, meeting every procedural requirement, and choosing a reputable adviser. The relief remains valuable, but only for well-constructed claims. Treating it as a technical submission demanding real evidence — not an easy windfall — is now essential to claiming safely and successfully.

How does R&D relief interact with grants and other funding?

A significant change under the merged scheme is the removal of the old subsidised-expenditure restriction. Previously, grant funding pushed SMEs onto the less generous RDEC scheme; now, the way a project is funded no longer reduces the relief available, and grant-funded companies can claim under the merged scheme or, if eligible, the more generous ERIS.

This is good news for businesses combining public funding with R&D, a common situation for innovative startups. It means a grant no longer forces a lower relief rate, simplifying the interaction between different funding sources. Companies that previously assumed grants ruled out generous R&D relief should revisit their position, as the rules now treat funded and self-funded R&D far more equally.

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