Innovative businesses are under pressure to do more with less, and research and development can feel like a luxury when cash is tight. The UK’s reformed R&D regime aims to make investment more manageable by offering either a taxable expenditure credit under the merged scheme or enhanced support for intensive SMEs. Used well, R&D relief can improve cashflow, extend your runway and de-risk technical decisions. UK business R&D spend reached £50.0bn in 2023, up 2.9% year-on-year, showing that investment remains a priority even in a challenging climate (see Business enterprise research and development, UK: 2023 – ONS, 2024). Meanwhile, HMRC’s latest approach notes an estimated 7.8% error and fraud rate in 2023–24, highlighting the need to meet the rules and document claims properly. In short, innovative businesses can still secure meaningful support, but the bar for compliance is higher.
How the reformed schemes work for innovative businesses
From accounting periods beginning on or after 1 April 2024, the UK runs a merged R&D expenditure credit (RDEC) scheme alongside enhanced R&D intensive support (ERIS) for loss-making, R&D-intensive SMEs. The merged scheme gives a 20% expenditure credit, which is treated as trading income and taxed at your corporation tax rate. As a rule of thumb, that means a net benefit of about 16.2% at the small profits rate or 15% at the main rate. ERIS lets qualifying loss-making SMEs deduct an extra 86% and claim a payable credit worth up to 14.5% of the surrenderable loss. Check the official guidance for eligibility, rates and the PAYE cap (see R&D tax relief: merged scheme and ERIS – HMRC, 2025).
A quick example
- A profit-making company spends £400,000 on qualifying R&D. Under the merged scheme, it records a £80,000 credit (20%). If taxed at 25%, the post-tax benefit is £60,000.
- A loss-making R&D-intensive SME with £400,000 qualifying spend could, under ERIS, generate a payable credit based on the surrenderable loss and the 14.5% rate, subject to the PAYE cap and other conditions.
What counts as qualifying R&D activity and cost
R&D must seek a scientific or technological advance and address technical uncertainty. Routine improvements, cosmetic UI changes or commercial experiments alone do not qualify. Costs commonly in scope include staffing, externally provided workers, consumables, software, and – for accounting periods beginning on or after 1 April 2023 – data licences and cloud computing where used directly for the R&D (see Check what R&D costs you can claim – HMRC, 2024).
Examples:
- Developing a novel machine-vision algorithm to detect defects in low-contrast materials, where feasibility and approach are uncertain.
- Re-engineering a manufacturing process to achieve a new tolerance limit that current methods cannot reliably meet.
- Building a proof-of-concept for a new encryption protocol whose performance characteristics under specific constraints are uncertain.
Subcontractors, grants and the PAYE/NIC cap
The reformed rules on contracted-out R&D focus on which party decided to undertake the R&D and bore the risk. Generally, the decision-maker claims. This change aims to align relief with the entity driving the innovation. If you commission a specialist lab to run experimental trials integral to your R&D, and you initiated that R&D, those costs may be in scope for your claim. Always map contracts and statements of work to the specific R&D activities.
Grants and subsidies: Under the old SME scheme, subsidies could restrict SME relief. Under the merged scheme and ERIS (for periods beginning on or after 1 April 2024), the prior SME-specific subsidy restriction is no longer the same issue; however, you still need to meet all qualifying rules and the payment condition, and choose the correct scheme for each cost line. If your periods straddle April 2024, the old rules may still apply to earlier periods – get advice.
PAYE/NIC cap: Cash credits and expenditure credits are subject to a cap of £20,000 plus 300% of the company’s relevant PAYE and NIC liabilities for the period. Excess amounts can be carried forward in the merged scheme (see PAYE cap within R&D tax relief: merged scheme and ERIS – HMRC, 2025).
Records, technical narrative and getting the paperwork right
HMRC expects a clear technical explanation of the scientific or technological uncertainties you faced, who the competent professionals were, and how you tackled the problems. Two mandatory steps now drive the process:
- Claim notification form: Many first-time or lapsed claimants must tell HMRC they plan to claim within 6 months after the end of the accounting period. Miss it and the claim for that period will fail (see Tell HMRC you’re planning to claim R&D relief – HMRC, 2024).
- Additional Information Form (AIF): You must submit the detailed AIF before or on the same day as filing the CT600 containing the claim, and crucially, the AIF must be submitted first.
Good practice for innovative businesses:
- Project logs: Keep sprint notes, lab books and version control history showing hypothesis, iterations and test results.
- Time tracking: Record staff effort by project and activity. Avoid retrospective estimates without evidence.
- Cost mapping: Tie invoices and payroll to specific qualifying activities. Flag data licence and cloud costs used directly in R&D.
- Gate reviews: Capture go/no-go decisions with technical rationale.
Claim windows, amended returns and enquiry trends
You can usually amend a Company Tax Return within 12 months of the filing deadline. As the filing deadline is typically 12 months after the period end, this gives an effective two-year window from the period end to include or amend an R&D claim – but do not leave it late, as the AIF and claim notification timings still apply (see Company Tax Returns: making changes – HMRC, 2025).
HMRC has increased compliance activity, with a stated focus on project eligibility, subcontracting, competent professional oversight and whether claimed costs were actually paid. The department reports a reduction in estimated error and fraud to 7.8% in 2023–24, reflecting tighter rules and checks. Innovative businesses that document properly, select the right scheme and apply the subcontracting rules consistently are far less likely to face prolonged enquiries.
A simple checklist to get started
- Eligibility check: Do our projects resolve genuine scientific or technological uncertainties, not just commercial ones?
- Scheme selection: Are we in the merged scheme or ERIS, and for which costs?
- Contracts review: Do our subcontract and grant documents align with who decided to do the R&D?
- Evidence pack: Do we have contemporary notes, prototypes, test data and source code history?
- Numbers and cap: Have we modelled the PAYE/NIC cap and the post-tax benefit for cashflow planning?
- Deadlines: Have we diarised the claim notification and the AIF sequence before filing the CT600?
Quick list items:
- Eligible activities: Work that seeks an advance and tackles uncertainty, evidenced by competent professionals.
- Qualifying costs: Staff time, EPWs, consumables, software, data licences and cloud computing where directly used in R&D.
- Red flags: Cosmetic changes, market research, routine testing without technical uncertainty, unsupported time apportionments.
Bringing it together for innovative businesses
Innovative businesses can still realise meaningful, predictable R&D support under the merged scheme and ERIS. The merged 20% expenditure credit provides a clear, above-the-line benefit, while ERIS protects intensive, loss-making SMEs. The prize is real, but so are the risks: weak narratives, poor time records, misapplication of subcontractor rules, or missed notifications can undermine an otherwise eligible claim. Use the official guidance, build evidence as you go, and model the PAYE/NIC cap upfront. If you are unsure how the decision-maker test applies to your subcontracted work, or whether ERIS fits your profile, we can help you design a compliant approach that supports cashflow and growth.
If you’d like an expert review, see our R&D tax relief support and speak to us for a practical assessment of your projects and costs. We work with innovative businesses to structure claims correctly, prepare robust AIF submissions and manage HMRC enquiries when needed.