Major Changes in 2025: New R&D Schemes
Key Changes from April 2024:
- New merged scheme replaces old RDEC and SME schemes
- Enhanced R&D Intensive Support (ERIS) for qualifying SMEs
- 20% expenditure credit rate under merged scheme
- Up to 186% deductions under enhanced intensive support
- 14.5% payable tax credit for intensive R&D companies
Which Scheme Applies to Your Business?
| Accounting Period Start Date | Available Schemes | Key Features |
|---|---|---|
| Before 1 April 2024 | Old SME scheme | 186% deduction, 10-14.5% payable credit |
| 1 April 2024 onwards | Merged scheme + ERIS | 20% credit (merged) or 186% deduction + 14.5% credit (ERIS) |
Small Business Eligibility Criteria
SME Definition (All Three Must Apply)
- Staff: Fewer than 500 employees
- Turnover: Less than €100 million annually
- Balance sheet: Total under €86 million
Company Requirements
- UK company liable to Corporation Tax
- Actively trading (not dormant or in liquidation)
- Conducting qualifying R&D activities
- Has not received over €7.5 million in R&D relief to date
Enhanced R&D Intensive Support (ERIS)
Additional Eligibility for Enhanced Support
To qualify for ERIS, your company must also meet these criteria:
ERIS Requirements:
- Loss-making: Trading loss before R&D deductions
- R&D intensive: R&D expenditure ≥ 30% of total expenditure
- Accounting period: Beginning on or after 1 April 2024
ERIS Benefits
| Benefit Type | Rate | Details |
|---|---|---|
| Additional deduction | 86% | On top of 100% normal deduction |
| Total deduction | 186% | 100% + 86% enhancement |
| Payable tax credit | 14.5% | Of surrenderable loss (subject to PAYE cap) |
Merged Scheme for All Other Companies
How the Merged Scheme Works
Companies not qualifying for ERIS use the merged scheme with these features:
- 20% expenditure credit on qualifying R&D costs
- Taxable credit (subject to Corporation Tax)
- Can be offset against current or future Corporation Tax
- Payable if in loss (subject to PAYE cap)
What Qualifies as R&D?
HMRC's Definition
Research and Development means activities that directly contribute to resolving scientific or technological uncertainties.
Qualifying Activities
✅ Activities That Qualify:
- Developing new products, processes, or services
- Improving existing products with new functionality
- Resolving scientific or technological uncertainties
- Creating new manufacturing processes
- Developing new software with technological advances
- Clinical trials for new treatments
❌ Activities That Don't Qualify:
- Market research or feasibility studies
- Routine data collection
- Commercial production
- Arts, humanities, or social sciences projects
- Copying existing products without innovation
- Quality control or testing existing products
Qualifying R&D Expenditure
Costs You Can Include
| Expense Category | What's Included | Restrictions |
|---|---|---|
| Staff costs | Salaries, NICs, pension contributions | Only time spent on R&D activities |
| Materials | Raw materials consumed in R&D | Not items incorporated into products for sale |
| Software | Directly used for R&D purposes | Must be consumed/transformed during R&D |
| Subcontractor costs | External R&D work | 65% of payments (some restrictions apply) |
| Utilities | Power, water, fuel for R&D | Must be additional usage for R&D |
Worked Examples: Tax Relief Calculations
Example 1: ERIS Qualifying Company
Software Development Company
- Annual turnover: £2 million
- Trading loss (before R&D): £200,000
- Qualifying R&D costs: £800,000
- Total expenditure: £2.2 million
- R&D intensity: 36% (qualifies for ERIS)
ERIS Calculation:
- Additional deduction: £800,000 × 86% = £688,000
- Total loss available: £200,000 + £688,000 = £888,000
- Payable credit: £888,000 × 14.5% = £128,760
- Cash benefit: £128,760
Example 2: Merged Scheme Company
Manufacturing Company
- Corporation Tax rate: 25%
- Qualifying R&D costs: £300,000
- Company profitable
Merged Scheme Calculation:
- R&D expenditure credit: £300,000 × 20% = £60,000
- Corporation Tax on credit: £60,000 × 25% = £15,000
- Net benefit: £60,000 - £15,000 = £45,000
- Net cash benefit: £45,000
PAYE Cap Restrictions
⚠️ Important Limitation
Payable credits are subject to the PAYE cap:
Maximum credit = £20,000 + (300% × company's PAYE and NIC contributions)
PAYE Cap Example
Company with £50,000 PAYE/NIC contributions:
- PAYE cap = £20,000 + (300% × £50,000) = £170,000
- If calculated credit is £200,000, payable amount is limited to £170,000
- Excess £30,000 can be carried forward to next accounting period
How to Claim R&D Tax Relief
Step 1: Identify Qualifying Activities
- Document specific technical challenges overcome
- Record scientific or technological uncertainties resolved
- Maintain detailed project records and timesheets
Step 2: Calculate Qualifying Expenditure
- Separate R&D costs from business-as-usual expenses
- Allocate staff time accurately to R&D projects
- Gather supporting documentation for all claims
Step 3: Submit Your Claim
- Include R&D claim in Corporation Tax return (CT600)
- Submit within 2 years of accounting period end
- Consider advance assurance for first-time claims
Advance Assurance for New Claimants
First-time claimants can apply for advance assurance to confirm HMRC will accept their claim before submission.
Benefits of Advance Assurance
- Confirmation your project qualifies before you claim
- Reduced risk of HMRC enquiries
- Peace of mind for significant R&D investments
- Faster processing of subsequent claims
Common Mistakes to Avoid
Frequent Errors:
- Overclaiming: Including non-qualifying activities or costs
- Poor documentation: Insufficient evidence of R&D activities
- Wrong scheme: Not identifying the optimal relief method
- Late claims: Missing the 2-year deadline
- Ignoring PAYE cap: Expecting full credit when employment costs are low
Industries That Commonly Qualify
Technology
Software development, AI, cybersecurity, blockchain innovations
Manufacturing
New production processes, materials science, automation systems
Healthcare
Medical devices, pharmaceuticals, diagnostic equipment, clinical trials
Engineering
Product design, prototyping, testing new technologies, process improvement
When to Seek Professional Help
Consider specialist R&D tax advice if:
- Your potential claim exceeds £100,000 annually
- You're unsure whether activities qualify as R&D
- You have complex multinational R&D arrangements
- You've received grants or subsidies for R&D projects
- HMRC has enquired into previous R&D claims
- You're considering advance assurance applications
Maximise Your R&D Tax Relief
Our R&D specialists help UK businesses identify qualifying activities, optimise claims, and navigate the new schemes. Book a free consultation to discuss your R&D projects and potential tax savings.