Executive summary
For accounting periods beginning on or after 1 April 2024, the UK replaced the former dual-track R&D relief system (SME scheme vs RDEC) with a single, merged RDEC-style scheme (the merged scheme), alongside a targeted continuation of SME-style support called Enhanced R&D intensive support (ERIS) for loss-making, R&D‑intensive SMEs.
The merged scheme is a taxable above-the-line expenditure credit at a headline 20% of qualifying R&D expenditure (non-ring fence), brought into taxable income and then applied through a statutory seven-step payment steps mechanism.
ERIS is not a second credit layered on top of the merged scheme. It is an alternative route (for eligible companies) that preserves the SME-style additional deduction (86%) and offers a 14.5% payable tax credit on surrendered losses for qualifying R&D-intensive, loss-making SMEs. Eligible businesses may choose between ERIS and the merged scheme for the same expenditure - but cannot claim both on the same costs.
A single set of qualifying expenditure rules now applies to both schemes, but the cash outcome depends heavily on: (i) profit vs loss position; (ii) the PAYE/NIC cap and whether the company is exempt; (iii) whether R&D is contracted out (and who is the decision-maker in the supply chain); and (iv) whether third‑party work is carried out overseas (generally restricted from April 2024 unless a narrow statutory exception applies).
Purpose and policy context
UK R&D reliefs are intended to correct a classic market failure: businesses may underinvest in R&D because the wider benefits (spillovers/positive externalities) are not fully captured by the investing firm. HMRC’s merged scheme/ERIS guidance expressly frames the objective this way.
The 2024 reforms pursued three practical policy goals visible across the official materials:
First, simplification and consistency: the merged scheme creates a single set of rules for claimants of any size, moving most claimants onto an RDEC-style framework.
Second, targeted generosity: ERIS is designed to continue enhanced support specifically for loss-making SMEs that are R&D-intensive, defined by an expenditure intensity test (now 30% from April 2024).
Third, integrity and compliance: the post‑2023 measures (claim notification rules, mandatory additional information form, and published Guidelines for Compliance) give HMRC more structured data and gating points before a claim becomes valid.
The legal basis for the new regime sits in amendments introduced by Finance Act 2024, which (among other things) replaced the previous expenditure credit framework with the new Chapter 1A R&D expenditure credit and amended the SME-style relief rules.
Eligibility and qualifying activities
The R&D project test: advance + uncertainty in science or technology
Relief is only available where activities meet the statutory meaning of R&D, which is grounded in GAAP and then modified for tax purposes by the Secretary of State’s R&D Guidelines. HMRC’s internal manual summarises the core test: a company must be undertaking a project seeking an advance in science or technology through the resolution of scientific or technological uncertainties.
Crucially, HMRC warns that commercial product development is not automatically R&D for tax purposes; only the sub‑activities that meet the Guidelines qualify (for example, market research is specifically not R&D).
Company-level gating conditions (both schemes)
At a high level, post‑April 2024 relief presumes the claimant is:
a company carrying on a trade, within the charge to Corporation Tax, and
not an ineligible company (notably, charities, higher education institutions, scientific research organisations, and health service bodies are treated as ineligible companies for these purposes).
Merged scheme: who can claim
Under HMRC’s merged scheme guidance, the merged RDEC expenditure credit is claimable by companies that are trading, chargeable to Corporation Tax, and have a project that meets the definition of R&D.
In the legislation, the R&D expenditure credit is framed as an entitlement to a credit in respect of qualifying expenditure, with conditions including not an ineligible company.
ERIS: who can claim
ERIS is available only where all the following apply:
The company meets the SME definition used for R&D relief (see below).
The company is loss-making: HMRC states an SME is loss-making if it makes a trading loss for tax purposes before the additional deduction is made - and without such a trading loss, there is no ERIS additional deduction or payable credit.
The company is R&D‑intensive under the statutory intensity condition: for accounting periods beginning on or after 1 April 2024, relevant R&D expenditure must be at least 30% of total relevant expenditure, including connected companies (worldwide) in the calculation.
A grace/look‑back rule applies: HMRC guidance and the internal manual describe circumstances where a company may still qualify based on meeting the intensity condition in its last 12‑month accounting period and having made a valid prior claim.
SME definition (for ERIS eligibility and certain analyses)
For R&D relief purposes, an SME is broadly defined using the EU SME concept but with a widely cited UK R&D-specific threshold set: fewer than 500 staff and either turnover of €100m or less or balance sheet total of €86m or less, with aggregation/partner/linked enterprise rules affecting the calculation.
Scheme mechanics and key differences
Headline comparison table
Attribute | Merged scheme (merged RDEC) | ERIS (Enhanced R&D intensive support) |
|---|---|---|
Applies for accounting periods | Beginning on/after 1 Apr 2024 | Beginning on/after 1 Apr 2024 |
Eligible claimants | Trading companies chargeable to CT with qualifying R&D (size irrelevant) | Loss‑making, R&D‑intensive SMEs meeting intensity condition |
Qualifying expenditure rules | Same rules as ERIS | Same rules as merged scheme |
Headline rate | 20% expenditure credit (non-ring fence) | 86% additional deduction (total 186%) and 14.5% payable credit on surrendered loss |
Tax treatment | Credit is taxable as trading income | Payable credit is not liable to tax (SME-style payable credit) |
How benefit is realised | Statutory “Step 1–7” payment mechanism: CT offset → notional tax → PAYE cap → group set‑off → other liabilities → cash (subject to conditions) | Additional deduction increases loss; company may surrender losses for payable credit; claim above PAYE cap invalid |
PAYE/NIC cap | Applies; excess at cap step is carried forward as next period RDEC entitlement | Applies; claim in excess of the cap is invalid (must restrict credit/surrendered loss accordingly) |
Subsidies/grants | No subsidised expenditure restriction (post‑Apr 2024) | No subsidised expenditure restriction (post‑Apr 2024) |
Contracted‑out R&D | “Decision-maker” principle; only one party in supply chain should claim; statutory definition of “contracted out” applies | Same contracting-out framework applies |
Overseas contractor/EPW costs | Generally excluded unless statutory exception for necessary overseas conditions applies | Same overseas restrictions apply (subject to specific NI provisions not covered here) |
Election/choice | ERIS-eligible companies may choose merged scheme instead; cannot double claim same expenditure | ERIS is elective vs merged for eligible companies |
Rates, tax treatment, and net benefit: what practitioners should internalise
Merged scheme headline rate (20%) is only the starting point. The credit is brought into taxable income.
From a modelling standpoint:
For a main‑rate taxpayer (25%), an illustrative “net” benefit is often 15% of qualifying spend (20% × (1 − 25%)), assuming no PAYE cap restriction and smooth utilisation through the payment steps. The 25% main rate is stated in HMRC Corporation Tax guidance.
For loss-makers and small profit-makers, the notional tax restriction is tied to the small profits rate in the payment steps framework, and the Government’s merged scheme technical note states that the notional tax rate applied to loss-makers in the merged scheme is 19% rather than 25%.
Under ERIS, the “up to” cash figure frequently quoted (about 26.97% of spend) is not a separate rate: it is the product of:
enhanced expenditure at 186% of qualifying costs (100% already in accounts plus an additional 86%), and
a payable credit at 14.5% of the surrenderable loss, capped by the lower of enhanced expenditure and the adjusted trading loss post additional deduction.
Qualifying expenditure: categories and post‑2024 changes that matter
HMRC’s “check what R&D costs you can claim” guidance is the most practical primary source for cost categories and includes several 2024‑specific rules.
Key post‑April 2024 points:
Subsidised costs: HMRC states there is no restriction on claiming for subsidised costs under the merged scheme or ERIS for accounting periods beginning on or after 1 April 2024.
Contractor payments (customer outsourcing R&D): where eligible, 65% of payments to unconnected contractors can be claimed; for connected contractors, the claim is restricted to the lower of the payment or the contractor’s relevant costs.
Data licences and cloud computing: qualifying expenditure includes these costs (from accounting periods beginning on/after 1 April 2023), but HMRC notes you cannot claim data/cloud costs for “qualifying indirect activities”; internal manual guidance also narrows data/cloud claims to direct R&D costs only.
Independent R&D contributions (pre‑2024 RDEC feature): HMRC states you can no longer claim this category for accounting periods beginning on or after 1 April 2024.
Contracted-out R&D: the “right to claim” is now a central technical risk
From April 2024, size/subsidy status no longer decides whether subcontracting “pushes” an SME into RDEC. Instead, the key question is who contracted out the R&D and intended it to occur.
In legislation, a person contracts out R&D if they enter a contract for activities, those include R&D, and it is reasonable to assume the person intended the R&D would be done when entering the contract.
HMRC’s internal manual puts the practical principle plainly: “only the party who takes the decision to undertake or initiate R&D will be able to claim” (subject to transitional provisions and limited exceptions).
One important exception: if the customer is an “irrelievable client”, the contractor may still be able to claim for R&D activity as contractor for an irrelievable client, including where the customer is an “ineligible company” or otherwise outside the charge to UK tax in respect of the contracting out.
Overseas restrictions: EPWs and contractor payments
For accounting periods beginning on or after 1 April 2024, overseas restrictions apply to contractor payments and EPW payments (not to in-house staffing, consumables, software, data and cloud as categories). HMRC’s overseas restrictions overview states the general rule: EPW spend not subject wholly or partly to UK PAYE and contractor payments for R&D undertaken overseas are excluded unless the statutory exception applies.
The exception (CTA 2009 s1138A) is narrow and requires that conditions necessary for the R&D are not present in the UK, are present where the R&D is undertaken, and it would be wholly unreasonable to replicate them in the UK; crucially, cost and availability of workers are explicitly disregarded as qualifying “conditions.”
PAYE/NIC cap, exemptions, and “why are my credits restricted?”
HMRC’s merged scheme guidance and internal manual set the PAYE cap as £20,000 + 300% of relevant PAYE and Class 1 NIC liabilities (with pro‑rating for short accounting periods).
Mechanically:
Under the merged scheme, the PAYE cap limits payable amounts at the cap step, and excess is carried forward as RDEC entitlement for the next period.
Under ERIS, a claim for payable credit above the cap is invalid (so the company must restrict the surrendered loss/credit claim to stay within the cap).
Exemption: the PAYE cap does not apply where the company meets both:
Condition A: it is creating (or preparing to create) relevant IP or performing significant IP management activities, undertaken wholly or mainly by employees; and
Condition B: payments to connected subcontractors/EPWs do not exceed 15% of qualifying R&D expenditure.
Repayment mechanics and cash in the bank: the merged scheme payment steps
The merged scheme is applied via a statutory seven-step mechanism:
discharge current period CT;
apply a notional tax deduction;
apply PAYE/NIC cap (carry forward excess);
discharge CT for other periods;
optional group surrender;
discharge other liabilities;
pay cash, subject to conditions.
Cash payment is subject to conditions including:
going concern condition when the claim is made; and
no enquiry and PAYE/VAT liabilities being up to date (with separate guidance on interim payments for amounts not in dispute).
Claim process and timelines
A practical end-to-end workflow (post-April 2024 claims)
HMRC’s “Claiming R&D tax relief” collection lays out a recommended step sequence and is a useful process map for clients and internal checklists.
A robust practitioner workflow is:
Establish eligibility: confirm the project meets the R&D definition (science/technology advance + uncertainty) and identify qualifying activities. HMRC has also introduced a project-check tool (“HMRC’s view” based on inputs) which can help new claimants frame their analysis, but it does not replace the need for proper evidence and cost linkage.
Determine “right to claim” in the supply chain: review contracts/SoWs to assess whether R&D was “contracted out” and who intended it; ensure you are not claiming for R&D contracted out to the claimant (generally excluded), and apply the irrelievable client exception where relevant.
Identify qualifying expenditure and apply overseas restrictions: build cost schedules using HMRC’s cost categories; treat overseas EPW/contractor spend cautiously and only include it where the statutory exception conditions are met and documented.
Select scheme: if the company is an R&D‑intensive loss‑making SME, model merged scheme vs ERIS and choose the better outcome (noting PAYE cap mechanics differ).
Meet pre-claim gating conditions:
Claim notification form: required for accounting periods beginning on/after 1 April 2023 where the company is a first-time claimant or has not made a valid claim within the relevant time window. The “claim notification period” ends 6 months after the end of the period of account; missing it can invalidate the claim.
Additional information form (AIF): must be submitted before or on the same day as the CT600, and if filed on the same day it must be submitted first; otherwise the claim is rejected.
Compute the claim:
Merged scheme: compute qualifying expenditure × 20% and then consider payment steps and PAYE cap implications.
ERIS: compute additional deduction (86%), enhanced expenditure (186%), and payable credit at 14.5% of surrendered loss.
File the corporation tax return:
Include the claim in the CT600, complete CT600L where required, provide bank details for payable credits, and complete the AIF/notification indicators.
Statutory deadlines and administrative timelines
Claim notification deadline: effectively within the claim notification period, ending 6 months after the end of the period of account, where the notification requirement applies.
AIF timing: must be submitted before or on the same day as the CT600, with same-day ordering requirements.
Main filing/claim window: HMRC guidance continues to frame claims through the Company Tax Return process and associated amendment windows; where a claim is out of time to amend, HMRC provides a separate disclosure route for overclaims. The specific amendment window length is not stated in the sources cited here and is therefore unspecified in this post; practitioners should apply the relevant Schedule 18 FA 1998 rules for their case.
HMRC processing time: HMRC does not commit to a fixed processing timeline in the official guidance pages cited above; processing time is therefore unspecified and will depend on risk profile and whether a compliance check/enquiry is opened.
Worked examples comparing identical projects under both schemes
The examples below assume:
accounting period begins after 1 April 2024;
non-ring fence trade;
all expenditure is qualifying;
PAYE/VAT are up to date and there is no enquiry at payment time for payable amounts;
CT rates are those stated in HMRC guidance (main 25%, small profits 19%).
Example assumptions for both projects
Qualifying R&D expenditure (QRE): £500,000
Merged scheme gross credit: 20% of QRE = £100,000
ERIS enhancement: additional deduction 86%; enhanced expenditure 186%
Profit-making company (main rate position)
ERIS is only available to loss-making R&D‑intensive SMEs, so for a profit-making company the ERIS column is not applicable.
Item | Merged scheme (profit-making; illustrative 25% CT rate) | ERIS |
|---|---|---|
QRE | £500,000 | N/A |
Gross credit (20%) | £100,000 | N/A |
CT on credit (illustrative, if charged at 25%) | (£25,000) | N/A |
Indicative net benefit | £75,000 (15.0% of QRE) | N/A |
Key caveats | PAYE cap can restrict payable amounts; group surrender/offset steps can change timing | ERIS not available unless loss-making |
Loss-making company (R&D-intensive SME) — comparing merged scheme vs ERIS
Because HMRC permits an ERIS-eligible company to choose between ERIS and the merged scheme (but not both for the same expenditure), a side-by-side comparison is essential.
Case 1: Large loss relative to R&D spend (ERIS reaches the headline cash rate)
Assume:
Trading loss (pre‑additional deduction): £1,000,000
PAYE/NIC cap is not restrictive (see cap example later)
Item | Merged scheme (loss-maker; small profits notional tax) | ERIS (loss-making R&D‑intensive SME) |
|---|---|---|
QRE | £500,000 | £500,000 |
Gross credit (20%) | £100,000 | N/A |
Notional tax at 19% (loss-maker/small profits rate) | (£19,000) | N/A |
Net credit after notional tax | £81,000 (16.2% of QRE) | N/A |
Additional deduction (86%) | N/A | £430,000 |
Enhanced expenditure (186%) | N/A | £930,000 |
Adjusted trading loss after additional deduction | N/A | £1,430,000 |
Surrenderable loss (lower of enhanced expenditure and adjusted loss) | N/A | £930,000 |
Payable credit at 14.5% | N/A | £134,850 (26.97% of QRE) |
Practical take | Often ERIS materially higher where losses are ample | Often best-in-class cash rate for eligible claimants |
Case 2: Low loss relative to R&D spend (ERIS can underperform the merged scheme)
Assume:
Trading loss (pre‑additional deduction): £200,000
PAYE cap not restrictive
Item | Merged scheme (loss-maker; small profits notional tax) | ERIS (loss-making R&D‑intensive SME) |
|---|---|---|
QRE | £500,000 | £500,000 |
Net merged credit after 19% notional tax | £81,000 (16.2% of QRE) | N/A |
Additional deduction (86%) | N/A | £430,000 |
Enhanced expenditure (186%) | N/A | £930,000 |
Adjusted trading loss after additional deduction | N/A | £630,000 |
Surrenderable loss | N/A | £630,000 (lower than enhanced expenditure) |
Payable credit at 14.5% | N/A | £91,350 (18.27% of QRE) |
Practical take | ERIS still higher than merged in this case, but does not reach 26.97% | Where losses are very small, merged scheme can sometimes be better because it is not limited by surrenderable loss (subject to PAYE cap) |
PAYE/NIC cap worked example: why merged scheme and ERIS behave differently
Assume:
QRE £500,000; merged scheme net after notional tax = £81,000;
ERIS surrenderable loss large enough to generate £134,850 credit (as in Case 1);
company has relevant PAYE/NIC liabilities of £5,000.
PAYE cap = £20,000 + 300% × £5,000 = £35,000.
Item | Merged scheme | ERIS |
|---|---|---|
Calculated payable amount (before cap) | £81,000 | £134,850 |
PAYE cap | £35,000 | £35,000 |
Outcome in-period | Payable limited to £35,000; excess carried forward as next period RDEC entitlement | Any claim over cap is invalid; claimant must restrict surrendered loss/credit to ≤ £35,000 |
Planning implication | Cash timing may slip via carry-forward; ensure forecasting | ERIS claim must be actively sized to cap; otherwise technical invalidity risk |
Compliance risks, record-keeping, common errors, and HMRC enquiry triggers
What HMRC expects you to be able to show
HMRC’s Guidance for Compliance (GfC3) makes the evidence expectation explicit: if HMRC opens a compliance check, it may request “anything reasonably needed” to evidence the claim—documents, site visits, prototypes/final products, and interviews with employees are all within scope.
From a practitioner perspective, “record keeping” is not just a defence file; it is increasingly a gating input into the AIF and a way to prevent preventable compliance checks. The AIF requires structured project and cost breakdown data per accounting period, and claims can be rejected if the AIF is not submitted correctly and on time.
High-frequency technical errors (particularly relevant post‑April 2024)
Misidentifying what counts as R&D: treating whole product/commercial projects as qualifying R&D, rather than isolating the scientific/technological uncertainties and the activities that resolve them. HMRC explicitly warns against assuming a “new product” project is fully R&D for tax purposes.
Failing the “right to claim” test in a supply chain: post‑2024, being the contractor performing technical work is not enough. You must evidence that you were the decision-maker (or fit the irrelievable client exception) under the contracted‑out definition.
Over-claiming overseas EPW/contractor costs: cost and talent availability are not valid “conditions” for the overseas exception; you need genuine necessary conditions not present in the UK and it must be wholly unreasonable to replicate.
Including non-qualifying cost categories: HMRC lists examples of costs that cannot be claimed (production/distribution, capital expenditure, land, patents/trademarks, rent/rates/leasing).
Getting PAYE cap mechanics wrong: for ERIS, claiming above the cap is not merely restricted—it is invalid. For the merged scheme, excess is carried forward. Misapplying this distinction is a common modelling and filing risk.
Process non-compliance: missing claim notification where required can invalidate the claim; submitting CT600 before the AIF can lead to rejection.
HMRC enquiry triggers: what can be said rigorously from published sources
HMRC does not publish an exhaustive list of enquiry triggers in the primary sources cited here; accordingly, an “official trigger list” is unspecified.
However, HMRC does publish signals of risk concentration and compliance focus that practitioners can use as proxies:
Sectoral risk: HMRC’s R&D tax relief collection page indicates that claims are “rarely eligible” in certain sectors (including care homes, childcare providers, personal trainers, wholesalers/retailers, pubs, restaurants). Claiming in these areas is not impossible, but it is a practical risk flag.
Credibility and evidence: GfC3 indicates HMRC may request deep evidence (documents, site visits, staff discussions), implying that weak contemporaneous evidence or unclear narratives will increase challenge risk.
Payment gating: for payable amounts, the merged scheme’s step 7 cash payment is conditional on no enquiry and PAYE/VAT being up to date; this makes enquiry opening/continuance a direct cashflow risk for clients expecting repayments.
If things go wrong: correction and professional standards
Where a company believes it has overclaimed and is out of time to amend its CT return, HMRC provides a specific route to disclose overclaimed R&D relief.
HMRC also provides a route for agents to report poor R&D tax relief service standards (misleading information, poor technical knowledge, dishonest behaviour), reflecting a compliance environment where adviser conduct can become part of the risk landscape.
Practical planning tips for accountants
Build the “right to claim” analysis into engagement planning: from April 2024, contracted‑out rules are central. Obtain contracts/SoWs and document who initiated R&D and who bore the risk at the time of contracting.
Forecast both ERIS vs merged scheme early for R&D‑intensive SMEs: HMRC explicitly permits an election to the merged scheme even if ERIS‑eligible, and the better outcome can depend on trading loss size and the PAYE cap.
Treat PAYE cap as a design constraint, not a post‑filing surprise:
For ERIS, size the surrendered loss so the payable credit stays within cap (avoid invalid claims).
For the merged scheme, model cash and any carry-forward under step 3.
Consider whether the cap exemption for companies actively managing IP could apply (and ensure connected-party spend tests are met).
Set a compliance calendar for the two new gating processes:
claim notification deadline (where applicable); and
AIF submission ordering relative to CT600.
Overseas work: route any overseas EPW/contractor cost through a “statutory exception memo” aligned to the “necessary conditions” test and explicitly address why cost or labour availability is not the driver.
R&D FAQs
Do we have to be an SME to claim R&D relief now?
No. The merged scheme is designed as a single set of rules for claimants “of any size”. SME status mainly determines whether ERIS could apply.
We’re profitable—can we use ERIS?
No. ERIS is only for loss‑making R&D‑intensive SMEs.
If we qualify for ERIS, can we still claim under the merged scheme instead?
Yes. HMRC says that even if eligible for ERIS you can choose to claim under the merged RDEC scheme, but you cannot claim both for the same expenditure.
What’s the PAYE/NIC cap?
HMRC sets the cap at £20,000 + 300% of relevant PAYE and NIC liabilities. Under the merged scheme, excess is carried forward; under ERIS, claims above the cap are invalid.
Can we claim for overseas developers or overseas subcontractors?
Generally, no for contractor/EPW costs, unless strict statutory conditions are met (necessary conditions not present in the UK and wholly unreasonable to replicate; cost and worker availability are disregarded).
We build software—does software count? What about cloud and data costs?
Software licence fees used for R&D can be claimed, and data/cloud costs are qualifying expenditure (subject to restrictions—data/cloud costs for qualifying indirect activities cannot be claimed).
Do we really need the Additional Information Form?
Yes. HMRC requires the AIF before or on the same day as the CT600, and if same day the AIF must be submitted first; otherwise the claim will not be accepted.
What records will HMRC ask for if they open a compliance check?
HMRC may ask for documents, site visits, prototypes/products, and interviews with staff—anything reasonably needed to evidence the claim.