Research and development (R&D) has long been the engine of the UK’s high-growth sectors. Yet the rules that convert a laboratory invoice into a corporation tax saving rarely stand still. The latest R&D relief reforms – enacted through the Finance Act 2024 and live for accounting periods beginning on or after 1 April 2024 – represent the most extensive shake-up in a decade. They merge the small or medium-sized enterprise (SME) scheme and the R&D Expenditure Credit (RDEC), introduce a new Enhanced R&D Intensive Support (ERIS) strand for the most innovative smaller companies, and tighten the compliance screws on every claimant.
Why has the Treasury acted? Two headline numbers tell the story. First, UK businesses spent £44.3bn on in-house R&D in 2023, up 8.3% year on year (ONS, 2024). Second, HMRC’s latest performance analysis put error and fraud across the old reliefs at 17.6% in 2021/22 (HMRC, 2024). Policymakers, therefore, faced the twin tasks of sustaining investment while protecting the Exchequer.
This blog sets out the key features of the reforms, the practical impact on claim values and cashflow, and the steps science and tech businesses should take now. Throughout, we draw on our experience guiding Oxfordshire’s innovation community and on first-hand conversations with HMRC’s R&D policy unit.
Why the government has changed course
The Spring Budget 2023 framed the overhaul in three policy objectives – simplicity, competitiveness and integrity. Two parallel schemes had bred confusion and arbitrage, particularly for mid-tier groups flipping between the SME and RDEC rules. In addition, the Office for Budget Responsibility (OBR) projects that annual R&D tax support will top £11bn by 2027/28 (OBR, 2024), so cost-control matters. The merged framework promises a single headline rate while still giving extra help to research-led SMEs whose R&D spend is more than 30% of total expenditure.
Understanding the reforms: headline changes at a glance
- Single, merged scheme: For expenditure incurred on or after 1 April 2024 the credit is a taxable 20% RDEC. It sits “above the line”, boosting EBITDA (earnings before interest, taxes, depreciation and amortisation), and is taxed at the company’s prevailing corporation tax rate, so the net benefit is 15% for companies paying the main 25% rate – still one of the most generous in the G7.
- Enhanced R&D Intensive Support (ERIS): Loss-making SMEs whose qualifying R&D exceeds 30% of total costs (threshold lowered from 40%) can choose ERIS. The repayable credit remains 14.5% of the loss surrendered, giving a cash benefit of up to 27 pence per qualifying £1.
- Overseas costs: The restriction on subcontractor and externally provided worker costs incurred outside the UK has been deferred to April 2027, giving businesses two further years to adjust global research footprints.
Two schemes to one: how the merged scheme works in practice
The merged credit mirrors the old RDEC mechanics.
- Calculation basis: Qualifying R&D spend × 20% credit rate.
- Tax treatment: Credit is taxable trading income. It first settles corporation tax for the period, then PAYE/national insurance contributions (NIC) cap tests apply, and any balance may be paid out or carried forward.
- Profit versus loss position: Profit-makers feel the benefit through a corporation tax reduction and a post-tax credit; loss-makers can access a payable element, subject to the cap.
The big win is predictability. Finance teams can model a straight 15% post-tax return on qualifying spend, streamlining decision-making and internal reporting.
Enhanced R&D intensive support: a lifeline for deep-tech SMEs
ERIS preserves a higher benefit for companies investing a significant share of turnover in experimental work – typical in biotech and clean-energy spin-outs. Key points are as follows.
- Intensity test: R&D spend ÷ total operating spend (excluding depreciation and finance costs) ≥ 30%.
- Credit value: Up to 27% cash return for loss-makers, unchanged from the temporary March 2023 measure.
- Election flexibility: Eligible companies may opt into ERIS each year but cannot claim both ERIS and the merged credit on the same costs.
The lowered threshold is expected to bring around 5,000 additional SMEs into scope. We recommend early modelling because a small shift in spend profile can swing eligibility.
New rates and cashflow planning
Corporation tax headline rate: 25% for profits above £250,000, tapered to 19% for profits up to £50,000. A company paying the small-profits rate enjoys a net merged-scheme benefit of 16.2% – higher than the 15% most claimants will bank.
Loss-maker considerations: Under ERIS, a £1m eligible R&D cost base can yield a cash credit of £270,000. Under the merged scheme the same company would receive a £200,000 credit, reduced by a 19% notional tax charge to £162,000. Choosing the correct route, therefore, matters more than ever. (Both figures can be restricted by the PAYE/NIC cap).
Ring-fenced trades: Higher credit rates apply for oil and gas ring-fenced trades, but specialist advice is essential.
Compliance tightening – what HMRC now expects
Error and fraud levels forced HMRC to hard-wire new safeguards.
- Claim notification form: First-time claimants, and companies that have not claimed in any of the previous three years, must notify HMRC within six months of the year end.
- Additional information form: All claims must be supported by a detailed form summarising projects, methodology and key costs before submission of the CT600.
- Named signatory: A senior officer of the company must endorse the claim, embedding personal accountability.
- PAYE/NIC cap: The payable element of the credit is capped at £20,000 plus three times the total employer PAYE/NIC for the period – a measure aimed at deterring artificial structures.
Robust record-keeping and contemporaneous technical narratives are therefore indispensable.
Practical steps businesses should take now
Cashflow forecasting
- Map historic R&D spend and model the 20% credit versus ERIS.
Systems and documentation
- Align project codes with the new reporting categories.
- Capture subcontractor location data ahead of the 2027 overseas cost restriction.
Governance
- Appoint a board-level R&D champion to review claims before sign-off.
- Schedule quarterly reviews: track intensity percentage, check that the qualifying activity continues to meet the “advance in science or technology” test and update budgets.
Engagement with HMRC • Consider advance assurance for first-time claims – HMRC has signalled it will become mandatory for high-risk sectors in due course.
Partner with advisers who speak your language
The R&D relief reforms reshape incentive values, eligibility thresholds and compliance obligations in equal measure. Getting the details right can be worth tens – sometimes hundreds – of thousands of pounds to a growing science or technology business. Our specialist team combines chartered tax expertise with sector insight, allowing us to translate complex legislation into clear, defensible claims. We prepare the additional information form, model merged-scheme versus ERIS outcomes, and support board discussions so that finance and innovation teams share a common view. If you would like a confidential review of your current or planned projects, please contact our R&D tax credit specialists.
We welcome an initial conversation to test eligibility, quantify potential benefits and put robust processes in place ahead of your next year end. Speak to us today and ensure your business extracts maximum value from HMRC’s R&D relief reforms – without unwelcome surprises.
