The April 2024 merger of the SME and RDEC R&D tax credit schemes was the biggest UK innovation-relief shake-up in two decades, and HMRC's published guidance is — to put it gently — opaque. This guide reconstructs the rules in plain English, with worked examples, so you can model what you actually receive in 2026 vs what you were getting in 2023.
What actually changed in April 2024
Before April 2024 the UK had two parallel R&D regimes:
- SME scheme — generous: profit-making SMEs got a 230% enhanced deduction (~24.7% effective relief at the 25% main rate); loss-making SMEs surrendered losses for a 14.5% payable credit on the surrenderable loss.
- RDEC (Research and Development Expenditure Credit) — for large companies and SMEs receiving subsidies: an above-the-line taxable credit at 20% of qualifying expenditure.
For accounting periods beginning on or after 1 April 2024, those two are gone. There is now one merged scheme that looks like RDEC, plus an enhanced "R&D intensive" carve-out for very R&D-heavy loss-making SMEs.
The merge was billed as simplification. In practice, for a typical loss-making SME that was claiming the old 33.35% effective benefit, the new headline rate is closer to 16.2% net of tax — a real-terms cut of more than half. Profit-making companies fared slightly better but still saw a reduction.
The new merged R&D scheme — how it works
The merged scheme is a 20% above-the-line credit on qualifying R&D expenditure. "Above the line" means the credit is treated as income (taxable), then offset against any corporation tax liability. The net benefit after corporation tax is roughly 15% for companies at the 25% main rate, or 16.2% at the 19% small profits rate.
| Company position | Gross credit | Corporation tax on credit | Net benefit |
|---|---|---|---|
| Profit-making, main rate (25%) | 20% × R&D spend | 25% | ~15.0% |
| Profit-making, small profits (19%) | 20% × R&D spend | 19% | ~16.2% |
| Loss-making (no CT to offset) | 20% × R&D spend | 19% (notional) | ~16.2% as a cash repayment |
Subcontracted R&D is now claimable by the company that decided to do the R&D, not the subcontractor. This is the single biggest behavioural change. Previously many software development agencies claimed R&D on work commissioned by their clients; now the claim sits with the client (assuming the client made the R&D decision). Some agencies have lost 30–60% of their historical R&D claim under the new rules.
Connected-party subcontracting is restricted to actual cost (no markup). Externally provided workers (EPW) — typically through agencies or contractor companies — are claimable but capped at the actual cost paid to the provider.
Enhanced R&D intensive support (the "Cliff Edge" rescue)
The single biggest preservation of the old SME scheme is the Enhanced R&D Intensive Support (ERIS). Loss-making SMEs whose R&D expenditure is at least 30% of total expenditure get to claim under a much more generous formula:
- 86% enhanced deduction (down from 130% in the old SME scheme but still significant)
- 14.5% payable credit on the surrenderable loss
- Effective net cash benefit of approximately 26.97% of qualifying R&D spend
The 30% threshold is calculated on total tax-deductible expenditure of the company and connected parties for the period. If R&D spend is £600,000 and total expenditure is £1.8M, you are R&D intensive (33%). If total expenditure is £2.2M, you are not (27%).
There is a one-year grace period: a company that qualifies as R&D intensive in one period and dips just below 30% the following period can still claim ERIS for that period (the "year of grace"). This was introduced to stop genuinely R&D-intensive companies losing the benefit due to a single quarter of unusual spending.
Worked examples — three companies, three outcomes
Company A — Profitable SaaS, £200K qualifying R&D
Profitable software company, £4M revenue, £200K qualifying R&D spend, paying CT at the small profits rate (19%):
- Gross credit: 20% × £200,000 = £40,000
- Less CT on credit: £40,000 × 19% = (£7,600)
- Net benefit: £32,400 (~16.2% of R&D spend)
Under the old SME scheme: £200,000 × 24.7% = £49,400. Reduction: £17,000.
Company B — Loss-making not R&D intensive, £500K qualifying R&D
Pre-revenue SaaS startup, £500K R&D spend, £2M total expenditure (R&D = 25%, below 30% threshold), pre-tax loss of £1.5M:
- Gross credit: 20% × £500,000 = £100,000
- Less notional CT (small profits): 19% = (£19,000)
- Net cash: £81,000 (~16.2% of R&D spend)
Under the old SME scheme: £500,000 × 33.35% = £166,750. Reduction: £85,750 — over half.
Company C — R&D intensive loss-making, £600K qualifying R&D
Same company as B but with £1.8M total expenditure instead of £2M (R&D = 33%, above threshold):
- Enhanced deduction: 186% × £600,000 = £1,116,000 (instead of £600,000)
- Surrenderable loss includes the £516,000 enhancement plus actual loss
- Payable credit at 14.5% on surrenderable loss
- Net cash benefit: approximately £162,000 (~27% of R&D spend)
This is the case where ERIS becomes life-or-death cash flow. R&D intensity reviews are now a standard tax planning exercise — small reclassifications of expense categories can flip a company over the 30% line.
What still qualifies as R&D (tightening since 2023)
HMRC's R&D enquiry rate has roughly tripled since 2022. Software claims are scrutinised hardest. The core test is still BIS Guidelines: an advance in science or technology, achieved by resolving scientific or technological uncertainty, by a competent professional in the field. But what HMRC is rejecting in 2025/26 enquiries:
- "Routine integration work" — connecting two SaaS APIs is not R&D, even if it's hard.
- "Use of existing techniques" — applying a known machine learning model to a new dataset is not R&D unless the model itself was uncertain.
- "Innovation without uncertainty" — being first to market with a product is commercial advance, not technological advance.
- Insufficient contemporaneous documentation — the project log, the failed approaches, the decisions to abandon hypotheses. Reconstructing this at year-end is no longer accepted.
Software claims should be supported by a competent professional's narrative naming the specific technological uncertainty, the experimental approach taken, what failed, and what advance the project achieved beyond the publicly available baseline.
Claim timing and the new pre-notification rule
For accounting periods beginning on or after 1 April 2023, new claimants (or claimants who haven't claimed in the previous three years) must submit a claim notification form to HMRC within 6 months of the end of the period of account. Miss this and your claim is invalid — no late-claim option, no appeal.
Example: period of account 1 January 2026 – 31 December 2026. Claim notification deadline: 30 June 2027. The actual claim itself can still be filed within the normal two-year window via the CT600 return, but the pre-notification is the trip-wire.
Established claimants who have submitted R&D claims in any of the previous three periods do not need to pre-notify. But miss three consecutive years and you reset to "new claimant" status.
Why the claim now has to live in the management accounts
R&D claims have moved from "specialist boutique product" to "audit-grade exercise." The boutique R&D advisory firms that charged 25% of claim value are losing clients — partly because HMRC's tightening makes their methodology untenable, partly because the smaller post-merger benefit no longer supports their fees.
Three things now matter that a once-a-year adviser cannot do for you: keeping the contemporaneous project documentation HMRC requires, tracking R&D intensity through the year (so you know before year end whether you will cross the 30% threshold), and recording qualifying costs in the management accounts as they happen, so HMRC does not find post-hoc adjustments at enquiry. That is a bookkeeping and reporting set-up job. Our monthly bookkeeping and management accounts (from £295/month) can carry R&D cost tracking as a standard part of the pack.
Send your details — we reply within one business day, by email if you want a sanity check on your 2026 R&D position — particularly if you're close to the 30% R&D intensity threshold.