Overview of the
Merged RDEC and ERIS Incentives
In April 2024, the UK overhauled its Research & Development (R&D) tax relief system, merging the two previously separate schemes into a single framework and introducing extra support for highly R&D-intensive small and medium-sized enterprises (SMEs). Prior to this reform, companies claimed R&D relief under either the SME scheme (for smaller companies) or the Research and Development Expenditure Credit (RDEC) scheme (primarily for large companies or certain subsidised projects). For accounting periods beginning on or after 1 April 2024, these have been unified into one merged R&D tax relief scheme, with a special enhanced credit available for qualifying R&D-intensive SMEs [1] [2]. These changes aim to simplify the system while targeting greater support to the most innovative, R&D-focused smaller companies.
In summary, as of 2024 we now have:
Below, we explain these changes in detail and what they mean for businesses and their advisors.
The New Merged
R&D Expenditure Credit Scheme
The merged R&D scheme effectively combines the best elements of the old RDEC and SME regimes into a single R&D Expenditure Credit system open to all companies. It works as an “above-the-line” tax credit, meaning the credit is calculated as a percentage of your qualifying R&D costs and accounted for as taxable income (which can reduce tax or be received as a payment) [8] [9]. Key features of the merged scheme include:
Single Scheme for All Companies
The previous distinction between the SME additional deduction scheme and RDEC is removed. Now any R&D-active company claims under the merged scheme for accounting periods starting on or after 1 April 2024 [10] [1]. This unification simplifies claims and means companies no longer “graduate” from one scheme to another as they grow or if they receive grant funding. All claimants follow one set of qualifying rules, easing administration [11] [12].
RDEC-Style Credit at 20% Rate
The credit rate under the merged scheme is 20% of qualifying R&D expenditure [13] [14]. This is the same rate that RDEC was temporarily increased to in April 2023 and is now fixed as the unified rate going forward. For example, £100 of eligible R&D spend yields a £20 credit before tax. (Different rates apply for certain ring-fenced trades such as oil & gas extraction, but most businesses will use the 20% rate [15].)
Taxation of the Credit
Like the old RDEC, the merged credit is treated as taxable trading income. In practice, the credit can first reduce your Corporation Tax bill; any remaining credit can be paid out to the company (net of tax). Notably, the government set the effective tax rate for loss-making companies at 19% (the small-profits rate) for this credit [14]. This means loss-making SMEs will not be penalised by the 25% main rate when the credit is paid out, making the relief more valuable to them.
Unified Qualifying Rules
The merged scheme adopts one set of rules for what R&D costs qualify, largely based on the RDEC approach, but with some improvements. Critically, the new scheme removes the old SME rule restricting relief on subsidised expenditure [16] [17]. Under the previous system, if an SME’s R&D project had any grant funding or subsidy, that subsidised portion had to be claimed under RDEC (often yielding a lower benefit). Under the merged scheme, all qualifying R&D costs – even if partially grant-funded – get relief at the 20% rate, without a reduction in respect of subsidies [18] [17]. This change is a significant simplification and a boost for companies collaborating with government or academic programs, as they no longer lose out on relief due to contributions received.
Incorporating the SME PAYE Cap
The merged scheme carries forward the more generous PAYE/NIC cap from the old SME scheme [8]. This cap limits the payable credit a company can receive to £20,000 plus 300% of its total PAYE and NIC liabilities for the period [19]. By using the SME version of the cap (as opposed to the stricter old RDEC cap), fewer companies – especially start-ups with low payroll – will hit this limit [8] [20]. This helps genuine small businesses claim the full credit they’re entitled to, while still protecting against abuse.
New Restrictions on Overseas R&D
Alongside the merger, new rules for overseas R&D expenditure take effect from April 2024. Generally, to qualify, R&D activities must be carried out in the UK unless it is “necessary” to use overseas resources due to certain conditions (e.g. clinical trials requiring a specific patient population or geological features only found abroad) [21] [22]. Cost or convenience are not accepted reasons – the work must genuinely require an overseas element. This reform, which applies to both the merged scheme and ERIS, was introduced to incentivise domestic R&D and prevent abuse of the relief via offshore subcontracting [21] [22]. Businesses should plan accordingly if they currently outsource R&D overseas.
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Enhanced R&D
Intensive Support (ERIS) for SMEs
Alongside the merged credit, a new Enhanced R&D Intensive Support (ERIS) has been introduced to continue offering higher relief to the most R&D-focused small companies. ERIS is essentially a modified version of the old SME scheme, preserved within the new system to benefit those companies for whom R&D is a substantial portion of their expenditure. Loss-making SMEs that meet the “R&D-intensive” criteria can choose to claim under ERIS instead of the regular merged credit (but not both on the same spend)[27] [28]. The key details of ERIS are:
Higher Payable Credit for R&D-Intensive SMEs
Qualifying companies can receive a tax-free cash credit worth up to 14.5% of their surrenderable R&D losses [29]. This rate is higher than the 10% payable credit available to other loss-making SMEs after April 2023, effectively giving extra cash to innovation-heavy businesses. Importantly, this credit is not taxable – unlike the merged scheme’s credit – so eligible SMEs get the full value of the 14.5% benefit [30]. In practical terms, a loss-making SME under ERIS can recover roughly 27 pence for every £1 of R&D spend (since they can surrender losses equal to 186% of the R&D cost – see below – at a 14.5% credit rate). This enhanced relief softens the blow of the reduced SME rates introduced in 2023 and targets subsidy toward the companies driving innovation [5][6].
Extra 86% Deduction (186% Total)
traditional SME scheme, ERIS allows an additional deduction on R&D costs before calculating losses. Under ERIS, a loss-making R&D-intensive SME can deduct an extra 86% of qualifying R&D expenditure on top of the normal 100% deduction, making a total deduction of 186% of those costs [29]. This inflated loss can then be surrendered to claim the payable credit. (In comparison, the standard SME scheme also allowed 86% from April 2023, down from 130% previously.) The combination of a 186% deductible expense and a 14.5% credit on losses leads to the ~27% effective support mentioned above.
Eligibility – Defining an “R&D-Intensive” SME
ERIS is only available to SMEs that are both loss-making and have high R&D intensity. Firstly, the company must meet the normal SME size criteria (fewer than 500 staff and under certain financial thresholds) and be trading at a loss for tax purposes in the period (before the R&D extra deduction) [31]. Secondly, it must clear the intensity test: R&D expenditure should be at least 30% of the company’s total expenses for the period [32]. (Initially the threshold was set at 40%, but it has been reduced to 30% for periods starting on or after 1 April 2024 to allow more firms to qualify [33] [34].) In other words, nearly a third or more of the company’s spending should be on R&D activities. When measuring this, you must include all relevant R&D costs that could qualify for relief and compare them to total expenditures (including those of any connected companies, to prevent avoidance by cost shifting) [32] [35]. HMRC’s guidance provides detailed rules on calculating this ratio, especially for groups or situations with varying year-ends [35] [36].
One-Year Grace Period
The rules recognise that a company might narrowly miss the 30% threshold one year due to extraordinary circumstances. Therefore, there is a “grace period” allowing continued ERIS claims for one year if the company met the intensity condition in the previous accounting period and had a valid R&D claim (under SME relief or ERIS) in that period [37] [38]. This grace year is designed to avoid penalising businesses for temporary dips in R&D spending – for example, if a firm had an exceptional one-off cost or a short-term change in spending mix. It ensures stability: an SME that qualified as R&D-intensive last year can still claim the enhanced credit this year even if it falls below 30% R&D spend, as long as it had been eligible and claimed in the prior year. However, two consecutive years below the threshold would remove eligibility until the condition is met again.
Optional vs. Mandatory
Eligible companies do not have to claim ERIS – they can opt to use the regular merged 20% credit scheme instead if, for instance, they expect to be profitable or find the credit interaction with tax to be more beneficial in their specific case [28] [27]. But they cannot claim both ERIS and the merged credit on the same expenditure. Essentially, ERIS is an alternative path within the single regime, reserved for those who qualify. Profit-making SMEs and any that do not meet the R&D intensity test will simply use the merged 20% credit scheme [39].
For context, the policy goal of ERIS is to support the most innovative SMEs – those spending a significant portion of their resources on R&D – especially when they are pre-profit. The government noted that these firms often struggle to raise capital and were hit hardest by the 2023 reduction in SME relief rates [6]. By offering a refundable credit at the old higher rate (14.5%) to R&D-intensive companies, the policy channels roughly £500 million of additional support per year to cutting-edge startups and research-heavy businesses [40]. This targeted relief is intended to sustain R&D investment in sectors like biotechnology, deep tech, and other high-tech fields where young companies might have long development cycles without profits. Estimates suggested that lowering the intensity threshold to 30% from April 2024 would bring around 5,000 extra companies into the ERIS scheme, providing an extra £50 million of support annually by 2028-29 [41]. In short, ERIS acts as a safety net to keep R&D-intensive SMEs funded through tax credits, even as the overall regime shifts toward a unified credit.
Impact on
Businesses and Advisors
For businesses, these changes have significant practical implications. Companies need to identify which part of the new regime they fall under for any accounting period beginning in April 2024 or later. In summary: if you’re an SME that will be profit-making or not highly R&D-intensive, you’ll be claiming the 20% merged RDEC-style credit going forward; if you are a loss-making SME with R&D making up 30%+ of costs, you can potentially claim the enhanced ERIS relief to get a larger credit [1] [34]. All large companies and non-SMEs will use the merged 20% credit (since ERIS is only for SMEs). Here are a few specific impacts and actions for companies:
Adjusting to a New Claim Method
SMEs that previously claimed the super-deduction and credit under the old scheme must adapt to the “above the line” credit mechanism. The merged credit will appear as income in the accounts (boosting accounting profit) and then offset tax or pay out. This can affect how R&D incentives are reflected in your financial statements and forecasts. Accounting teams and advisors should ensure they correctly include the credit in Company Tax Returns (CT600) and use the revised R&D supplementary form (CT600L) sections appropriate to the merged scheme or ERIS [42] [43]. The process of claiming is slightly different but HMRC has updated guidance on how to claim under the merged scheme or ERIS on the corporation tax return [44] [42].
Revised Benefit Levels
Many SMEs will find that the net benefit from R&D tax credits has changed. For a profitable SME, the benefit of the R&D credit is now effectively 15% (a 20% credit taxed at 25% corporation tax rate) whereas before they got a reduction in taxable profits (which at the small profits rate 19% would save ~16% of costs, so broadly similar). For loss-making SMEs, those not meeting the intensity condition, they will now receive an R&D credit which is effectively 16.2% (a 20% credit taxed at 19% corporation tax rate) (down from 18.6% previously), while those qualifying as R&D-intensive can still get ~14.5% credit (actual yield being approx. 27% (maintaining a higher subsidy) [45] [46]. This means SMEs with modest R&D activity will see less generous support than in prior years, whereas the most R&D-heavy startups maintain a higher level of relief. Businesses may need to factor this into budgeting for R&D projects. Advisors should help clients estimate their likely credit under the new rules and explore if projects remain viable or if additional funding is needed to supplement the reduced relief for some. On the other hand, companies receiving grants or subsidies for R&D will benefit more under the new scheme because they are no longer penalised by restricted claims [18]. Such businesses might see an increase in their credit compared to the old rules, as they can claim the full 20% credit on qualifying costs even if partially funded externally.
Meeting the Intensity Test
SMEs close to the 30% R&D intensity threshold should monitor their spending mix. If being above 30% could yield a substantially larger credit, there is a real incentive to track and possibly prioritise R&D expenditures in tight years to retain eligibility for ERIS. However, companies should also note the grace period – a single year drop below 30% doesn’t foreclose the enhanced credit if the prior year qualified [37]. Advisors can assist in calculating the R&D intensity ratio, especially for groups (including connected companies’ expenditures in the calculation can be complex [32] [35]). Good record-keeping of R&D costs and total expenditures will be essential.
Compliance and Notification Requirements
The R&D reform goes hand-in-hand with a crackdown on abuse and error in R&D claims. All companies must now inform HMRC in advance if they plan to claim R&D relief (unless they have claimed in the previous 3 years), using a digital claim notification form [47]. Additionally, for any claim made, a detailed Additional Information form must be submitted outlining the R&D projects and costs. These requirements became mandatory in August 2023 for claims and continue under the new regime. Businesses and their accountants should ensure they complete these steps – for instance, checking whether they need to notify HMRC and preparing the necessary technical documentation [48] [47]. Missing these could invalidate a claim. As R&D tax relief rules tighten, working closely with a knowledgeable advisor to meet all compliance steps is prudent.
Impact on Strategic Decisions
In some cases, the new regime might influence whether companies decide to carry losses forward or surrender them for credit. Under the merged scheme, since the credit is taxable and uses a portion to settle tax, a loss-making company might prefer to carry the loss forward if it expects future profits taxed at 25%, rather than take a current credit taxed at 19%. Conversely, under ERIS, the credit is tax-free, so cashing in the loss at 14.5% can be very attractive for a pre-revenue firm. Advisors should model these scenarios for clients to determine the optimal approach (keep the loss vs. claim the credit) based on the company’s growth projections and cash needs.
Overall, the impact of the reforms is a mix of simplification, refocusing of relief, and increased oversight. The government expects a positive outcome: a single streamlined scheme reduces complexity and the chance of errors, and by maintaining an enhanced incentive for intensive R&D spenders, the policy continues to encourage high levels of innovation [24]. For advisors like accountants and tax consultants, there will be a learning curve to master the new rules, but also an opportunity to add value. Businesses will rely on advisors to interpret the changes, ensure compliance with the new claim process, and to maximise their benefit under the appropriate scheme. In particular, identifying companies that qualify for the ERIS higher credit and ensuring they claim it (or planning to meet the criteria in future) can substantially increase the funding available to those clients.
Navigating the new
R&D landscape – next steps
With these changes now in effect, it’s crucial for companies investing in R&D – and the advisors supporting them – to update their understanding of the rules. Here are some steps to take:
Review Official Guidance
The UK government has published updated guidance on claiming R&D relief under the merged scheme and ERIS [7] [44]. Make sure to review the latest HMRC materials and manuals for detailed definitions (for example, what qualifies as R&D, how to compute the intensity ratio, etc.) and any sector-specific provisions.
Assess Your Eligibility
Determine whether your company (or client) will be claiming the standard 20% RDEC-style credit or if it qualifies for the 14.5% ERIS credit. Check the R&D intensity percentage for recent periods and going forward – if it’s near or above 30%, and you anticipate a tax loss, you likely qualify for the enhanced support [34].
Plan for Transition
If you previously claimed the SME relief, discuss with your advisor how the transition to the merged credit will work for your next accounting period. There may be transitional considerations, such as finalising any last SME claims for periods pre-April 2024 and ensuring new claims follow the merged scheme rules.
Ensure Compliance
Register any planned R&D claims with HMRC through the notification process, and prepare to submit the required additional information with your tax return [47]. The new landscape comes with tighter compliance to deter fraud – accurate claims with robust documentation are more important than ever.
Seek Expert Support
R&D tax relief remains a valuable source of funding for innovation, but the rules are evolving. Engaging a specialist can help you navigate nuances like the PAYE cap, connected party calculations, or how to treat subsidised projects (now allowable) under the merged scheme.
Innovation Tax is here to help businesses and advisors make sense of these changes. Our team specialises in R&D tax incentives and has been tracking the reform closely. We can assist you in evaluating your R&D spend, determining eligibility for the enhanced SME support, and optimising your claim under the new single scheme. Whether you are unsure how the new credit will apply to your projects or need guidance on the HMRC claim process, we invite you to reach out to Innovation Tax for support. We offer professional, clear advice to ensure you fully benefit from the R&D reliefs available while staying compliant with HMRC’s requirements.
We're here to help
Contact us to discuss how the merged R&D scheme and the enhanced R&D-intensive SME relief could impact your business. With expert guidance, you can confidently navigate the new R&D tax landscape and continue to claim with confidence and certainty.
