R&D Tax Relief for Small Companies: How the Merged Scheme Works

R&D tax relief rewards UK companies that spend money solving scientific or technological problems. For most small companies, the relief now runs through a single merged scheme, which gives a taxable credit of 20% of qualifying costs. Loss-making companies that spend heavily on R&D have a more generous option called ERIS. This guide explains who qualifies, which costs count, how much the relief is worth and the steps HMRC now expects before it accepts a claim.

It is written for directors of small UK limited companies. The rules below apply to accounting periods beginning on or after 1 April 2024.

• What is R&D tax relief?
• Who qualifies for R&D tax relief?
• What counts as R&D for tax purposes?
• Which costs qualify?
• How the merged scheme and ERIS work
• How to claim R&D tax relief
• Common mistakes that get claims rejected
• How much is the relief worth?
• Frequently asked questions

What is R&D tax relief?

R&D tax relief is a Corporation Tax relief for companies that carry out qualifying research and development. It reduces your company’s Corporation Tax bill or, where the company has no tax to pay, is paid out in cash. You claim it through your company tax return, not through a separate grant application.

Before April 2024 there were two schemes, the SME scheme and the R&D Expenditure Credit (RDEC). They have since been combined into a single merged scheme. A separate route, Enhanced R&D Intensive Support (ERIS), covers loss-making companies whose spending is heavily weighted towards R&D.

Who qualifies for R&D tax relief?

Your company can claim if it:

• is a UK company within the charge to Corporation Tax
• carried out a qualifying R&D project in the accounting period
• paid for the qualifying costs itself

Sole traders and partnerships cannot claim. If you are a sole trader doing innovative work, the relief is one of several reasons to look at setting up a limited company.

Company size only matters for ERIS, which is limited to small and medium-sized enterprises. That means fewer than 500 staff and either turnover of no more than €100 million or a balance sheet total of no more than €86 million. The merged scheme is open to companies of any size.

There is no minimum spend, but the claim must be backed by records that show what the project was and why it counts.

What counts as R&D for tax purposes?

HMRC applies the Department for Science, Innovation and Technology (DSIT) guidelines. A project qualifies if it seeks an advance in science or technology by resolving scientific or technological uncertainty. In other words, a competent professional in the field could not readily work out how to achieve the result from knowledge already available.

The advance must be new to the field as a whole, not only new to your company. Work that copies or adapts a known solution does not qualify, even when it was hard for your team. Since April 2023, advances in pure mathematics also count.

Examples of what can qualify

• A software business developing a new way of processing data where nobody knew at the outset whether the approach would work
• A manufacturer developing a new material or production process that needed testing to prove
• A construction business trialling a building technique because the outcome was uncertain
• A healthcare provider developing a new diagnostic technique
• An e-commerce business building a technical system that existing tools could not deliver

What does not qualify

• Cosmetic changes, design work or rebranding
• Routine software updates, bug fixes or configuring existing software
• Market research, sales and business planning
• Work in the arts, humanities or social sciences
• Applying a known technique in a new setting without any technological uncertainty

Which costs qualify?

Staff costs

Staff costs are usually the largest part of a claim. You can include salaries, employer National Insurance and employer pension contributions for staff working directly on the project, in proportion to their time on it. If an engineer spends 60% of their time on qualifying work, 60% of their staff costs go in.

Subcontractors and freelancers

Payments to unconnected subcontractors and to agency or freelance workers are usually restricted to 65% of the amount paid. Under the merged scheme, the company that decides to carry out the R&D and bears the cost is the one that claims. Since April 2024, costs for subcontractors and externally provided workers based outside the UK generally do not qualify, unless the work could not be done in the UK for geographical, environmental, social or legal reasons.

Materials and consumables

Materials used up or transformed in the R&D, such as those used in testing or prototypes, can be included. Materials that end up in products you sell cannot.

Software, data and cloud computing

Software licences used for the project can be included in proportion to their R&D use. Since April 2023, datasets and cloud computing costs used directly in the project also qualify.

Utilities

Power, water and fuel used in the R&D can be included where you can show how much relates to the project.

Costs you cannot include

• Capital expenditure, which may qualify for capital allowances instead
• Rent, rates and general office overheads
• Patent, legal and marketing costs
• Interest and finance costs

How the merged scheme and ERIS work

The merged scheme

The merged scheme gives a credit of 20% of qualifying expenditure. The credit counts as taxable income, so its net value depends on your tax rate. For a company paying the 25% main rate, the net benefit is 15p for every £1 of qualifying spend. For companies paying the 19% small profits rate, and for loss-making companies, which are taxed on the credit at a notional 19%, the net benefit is 16.2p per £1.

The credit first reduces your Corporation Tax bill. Any amount left over is paid out in cash, subject to a cap of £20,000 plus 300% of the company’s PAYE and National Insurance bill for the period.

Enhanced R&D Intensive Support (ERIS)

ERIS is for loss-making SMEs whose qualifying R&D spending is at least 30% of their total relevant expenditure. It gives an extra deduction of 86% of qualifying costs, and the company then surrenders the resulting loss for a payable credit of 14.5%. In practice this is worth up to about 27p in cash per £1 spent.

If your company is pre-revenue or loss-making because most of its spending goes on R&D, check whether ERIS applies before you claim under the merged scheme.

How to claim R&D tax relief

1. Check whether you need to send a claim notification. If this is your company’s first claim, or it has not claimed in the previous three years, you must notify HMRC online within six months of the end of the period of account. If you miss this deadline, HMRC will not accept the claim.
2. Identify your qualifying projects. Record what each project set out to achieve, what the uncertainty was and how your team worked to resolve it.
3. Calculate your qualifying costs. Use payroll records, timesheets, invoices and software bills for each cost category.
4. Submit the Additional Information Form. Every claim needs this form, sent online before the company tax return. It sets out the projects, the costs and the person responsible for the claim.
5. File your company tax return. The claim goes on your CT600 and must be made within two years of the end of the accounting period.

Keeping good records

HMRC now checks a much higher share of claims than it did a few years ago. Keep project notes, technical reports, test results and a record of what did not work, made at the time rather than written up later. Up-to-date bookkeeping makes it far easier to separate R&D costs from everything else.

Common mistakes that get claims rejected

• Claiming routine work. Mixing ordinary development into a claim is the most common reason HMRC reduces or rejects one.
• Missing the claim notification. First-time claimants who do not notify HMRC within six months of the period end lose the claim entirely.
• Leaving out the Additional Information Form. Without it, HMRC treats the claim as invalid.
• Including overseas contractor costs. Most overseas subcontractor and freelancer costs stopped qualifying from April 2024.
• Weak records. If you cannot produce evidence when HMRC asks, the relief can be withdrawn with interest and penalties.
• Using a claims firm on a percentage fee. Some firms charge 20% to 30% of the claim and submit claims that do not hold up, leaving the company to deal with any HMRC enquiry.

How much is the relief worth?

These examples use £100,000 of qualifying R&D spend.

• Profitable company paying 25% Corporation Tax, merged scheme: a credit of £20,000, worth £15,000 after tax.
• Loss-making company, merged scheme: a credit of £20,000, worth £16,200 after the notional 19% tax, paid in cash subject to the PAYE cap.
• Loss-making R&D-intensive SME, ERIS: an extra deduction of £86,000, giving a surrenderable loss of £186,000 and a payable credit of up to £26,970.

Your actual figure depends on your tax position and the PAYE cap. Tracking R&D costs in your management accounts during the year gives you a reliable figure well before the deadline.

Frequently asked questions

Can a sole trader claim R&D tax relief?

No. R&D relief is for companies only, as covered in the eligibility section above.

How far back can I claim?

You have two years after the period ends to make the claim. For a period ending 31 March 2025, the claim must be made by 31 March 2027. First-time claimants must also tell HMRC in advance that they plan to claim.

Do I need to have made a profit to claim?

No. A loss-making company can take the credit as a cash payment, within the PAYE cap. Loss-making, R&D-heavy SMEs may qualify for the higher ERIS rate.

What is the Additional Information Form?

It is an online form HMRC requires for every R&D claim. It must reach HMRC before you file the company tax return.

Can I claim for work done by subcontractors?

Usually yes, at 65% of the amount paid to an unconnected subcontractor, provided your company decided to carry out the R&D and paid for it. Most overseas subcontractor costs do not qualify.

Does a grant stop me claiming?

Not under the merged scheme, which no longer reduces relief because a project received a grant or subsidy. Under ERIS, subsidised expenditure still restricts what you claim, so tell your accountant about any grant funding.