UK R&D tax credits are changing! Whether your accounting period falls before or after the April 2024 changes, this guide will help you estimate your potential R&D tax credit.
For accounting periods on or after 1 April 2024, the old SME and RDEC schemes will be replaced by a new merged R&D Expenditure Credit scheme, with an additional scheme called Enhanced R&D Intensive Support (ERIS) for certain loss-making SMEs.
In this guide, we’ll run through each of these factors, with a particular focus on the financial position calculations, which we don’t cover elsewhere in our resources.
In this article:
Which business activities qualify for an R&D claim?
In brief, if you’re using skilled employees, or what HMRC like to call competent professionals, like engineers, scientists or skilled artisans to create or modify products, services or production processes, then those activities will likely be classed as research and development and thus qualify for R&D Tax Relief.
There are additional factors, such as whether your work contributes to an advance in science or technology, and whether you are resolving uncertainty. You can check with our eligibility assessment tool to see if you qualify.
While some of your competent professionals’ time will be taken up with R&D, some will also likely be for more mundane business-as-usual activity. You’ll need to separate out the R&D work from their BAU work.
How much R&D tax relief can your business claim?
The amount of R&D tax relief that your business can claim depends on several factors, including:
1. Which costs you associate with your R&D
Over 90% of the costs we claim for are in three areas: staff costs, consumables and subcontractors.
Consumables are the physical materials, hardware and resources used up by the R&D. The most common examples are fuel, power, water and chemicals.
Staff are those employees engaged in the R&D while being on your payroll, whereas subcontractors will typically charge by invoice, and aren’t enrolled on your payroll.
For a more complete breakdown of the costs you can claim, consult our guide to qualifying R&D costs.
2. Which scheme applies to you?
Accounting periods starting on or after 1 April 2024
Merged R&D Expenditure Credit scheme: For accounting periods starting on or after April 1, 2024, the SME and RDEC schemes combine into a merged RDEC scheme, alongside Enhanced R&D Intensive Support (ERIS) for R&D-intensive loss-making SMEs.
This scheme gives you a tax credit that’s added to your income, with a gross rate of 20%. The net benefit you receive is between 14.7% and 16.2% of your qualifying R&D expenditure, depending on your Corporation Tax rate.
ERIS scheme: R&D-intensive loss-making SMEs can claim through the ERIS scheme. An R&D-intensive SME is a company with qualifying R&D expenditure that makes up at least 30% of its total expenditure. The ERIS scheme can give you a tax credit worth up to 27% of your R&D spending, and this credit isn’t taxed! However, the actual benefit can vary depending on your trading losses. It can be as low as 12.47% for companies with minimal losses, which might be lower than the merged RDEC scheme in certain situations. If your ERIS benefit is low, it might be more advantageous to claim under the merged R&D scheme instead.
| R&D Scheme (from 1st Apr 2024) | Description | Net Benefit | Key Features |
|---|---|---|---|
| Merged R&D Expenditure Credit Scheme (RDEC) | The standard scheme for all companies doing R&D. | 14.7% – 16.2% (depending on Corporation Tax rate) | Above-the-line credit, offsets Corporation Tax, PAYE/NIC cap applies. |
| Enhanced R&D Intensive Support Scheme (ERIS) | For loss-making R&D-intensive SMEs (at least 30% of total expenses on R&D). | Between 12.5% and 27% | Higher credit rates, not subject to Corporation Tax, PAYE/NIC cap applies. |
Accounting periods before 1 April 2024
For accounting periods that start before 1 April 2024, there are two R&D tax credit schemes: the Research and Development Expenditure Credit (RDEC) and Small-Medium Enterprise (SME) schemes.
The RDEC scheme returns 20% gross and 15% net of your qualifying R&D expenditure. Meanwhile, the SME scheme returns up to 27%, and the credit is not subject to corporation tax. Prior to accounting periods after 1 April 2024, the main reason businesses make an R&D claim through the RDEC scheme is their size.
R&D-intensive SMEs have access to the highest %, which is 27%. An R&D-intensive SME before accounting periods on or after 1 April 2024 is a company with qualifying R&D expenditure that makes up at least 40% of its total expenditure.
| R&D Scheme (before 1st Apr 2024) | Description | Net Benefit | Key Features |
|---|---|---|---|
| RDEC Scheme | For large companies and certain SMEs. | 20% gross, 15% net | Above-the-line credit. |
| SME Scheme | For most SMEs. | Up to 27% | Higher credit rates, not subject to Corporation Tax. |
3. The role of company size
Accounting periods post 1 April 2024: ERIS and R&D-Intensive SMEs
Under the new structure, the company size test applies only to R&D-intensive SMEs. Qualifying SMEs must meet the following criteria:
- Fewer than 500 staff
- Turnover under €100m or a balance sheet total under €86m
- R&D expenditure making up 30% or more of total costs.
- Must be a company operating at a loss
This threshold ensures that only R&D-focused SMEs benefit from the enhanced ERIS relief rates.
Note that the limits are in euros because the HMRC rules were adapted from European-wide rules.
Accounting periods pre-1 April 2024
Before the merged scheme, company size determined access to the SME scheme. Additionally, grants, subcontracting, or part-ownership by larger entities often required businesses to claim through RDEC instead.
4. Your firm’s financial position
Financial position & R&D Tax Relief: Post-April 2024 Merged RDEC Scheme + ERIS
For accounting periods starting on or after 1 April 2024, the merged RDEC scheme applies. Your financial position will impact the amount of relief you can claim as follows:
Merged R&D Expenditure Credit (RDEC) Scheme calculation process:
- Calculate your gross RDEC: R&D expenditure x 20%
- Deduct notional tax: Gross RDEC x 25%
- Calculate Corporation Tax on the adjusted RDEC: This depends on your company’s profit level and the applicable Corporation Tax rate (19%, marginal relief, or 25%).
- Subtract the corporation tax from the adjusted RDEC to get your net benefit.
Financial position scenarios:
- Small profits/loss-making (19% Corporation Tax): The net benefit is roughly 16.2% of R&D expenditure.
- Marginal relief (e.g., 22% Corporation Tax): The net benefit falls between 14.7% and 16.2%.
- Main rate (25% Corporation Tax): The net benefit is around 15% of R&D expenditure.
Post-1 April 2024 Financial Position Breakdown:
| Financial Position | Net Benefit Under Merged RDEC Scheme | Net Benefit Under ERIS Scheme (for R&D-intensive SMEs) |
|---|---|---|
| Break-even | 16.2% of R&D expenditure | Not applicable |
| Loss-making | 16.2% of R&D expenditure | Up to 27% (depending on trading losses) |
| Profit-making | 14.7% – 16.2% of R&D expenditure (depending on Corporation Tax rate) | Not applicable |
Financial position & R&D Tax Relief: Pre-April 2024 SME scheme
For accounting periods before 1 April 2024, the SME scheme applies. Here’s how your financial position impacts your claim under the SME scheme:
- Break-even companies (pre-April 2024 SME scheme): You’ll get 8.6% of your R&D expenditure back.
- Loss-making companies (pre-April 2024 SME scheme): You can get up to 18.6% back, or even 27% if you’re an R&D-intensive SME.
- Profit-making companies (pre-April 2024 SME scheme): Your credit is calculated based on how much your R&D reduces your taxable profit, with a cap of 21.5%.
