Senior finance leaders have a lot to balance this year. The UK’s R&D tax relief rules now run through a single merged scheme for accounting periods beginning on or after 1 April 2024, with a separate track for R&D-intensive SMEs. The intention is simpler rules and tighter compliance, but the practical effect is a different calculation, new forms, new deadlines, and closer scrutiny of your technical evidence. Get the approach right and you protect valuable cashflow – get it wrong and you risk delays, reductions, or a rejected claim.
At a high level, the merged scheme provides a 20% R&D expenditure credit that is taxable for corporation tax purposes. Loss-makers face a “notional tax” set at the small profits rate, currently 19%. Understanding how these interact – and how HMRC expects you to evidence your projects – is essential before you press submit. The government’s aim is to focus support on genuine innovation and reduce error. That direction of travel is clear: UK businesses still invested £50 billion in R&D during 2023, a 2.9% uptick on 2022, underlining the scale of activity that needs the incentive to work smoothly (ONS, 2024).
In this guide, we unpack what has changed under the merged scheme, the costs you can include, how the 20% credit and 19% notional tax rate work, and what HMRC now expects from your technical narrative. If you would like tailored advice, our taxation and corporate tax planning teams can help you prepare a robust claim and manage any HMRC enquiries.
What the merged scheme changes for 2025/26
The merged scheme applies RDEC-style rules to all companies, replacing the old SME and RDEC split for accounting periods beginning on or after 1 April 2024. The key points:
- Credit rate: 20% of qualifying R&D expenditure, paid as an above-the-line taxable credit.
- Tax treatment: The credit is taxable trading income. Once corporation tax is applied, the net benefit for profit-makers typically falls in the mid-teens.
- Notional tax for loss-makers: HMRC applies a 19% notional tax rate when offsetting the credit for companies without a Corporation Tax liability, aligning with the small profits rate.
- PAYE/NIC cap: The payable amount is capped at £20,000 plus 300% of the company’s relevant PAYE and NIC liabilities.
- R&D-intensive SMEs: If relevant R&D is at least 30% of total expenditure, a loss-making SME may choose the enhanced R&D-intensive support track (ERIS) instead of the merged scheme; you cannot claim both on the same spend.
Qualifying costs: What you can include under the merged scheme
Qualifying categories remain broadly familiar, but you should confirm treatment project by project:
- Staff costs: Gross pay, employer NIC and pension contributions for employees directly and actively engaged in the R&D.
- Externally provided workers: Agency or group staff supplied to you, subject to the usual restrictions and connected-party rules.
- Subcontracted R&D: Claim rules hinge on who decided to undertake the R&D and bore the risk. Contracting-out rules were updated – check whether you, or your contractor, is entitled.
- Consumables: Materials, power and water consumed or transformed by the R&D.
- Software, data and cloud: Licence fees and computation services used directly for the R&D, including reasonable apportionments for multi-use tools.
- Clinical trial volunteers: Payments for subjects and recruitment costs in qualifying trials.
Overseas costs are now restricted for accounting periods beginning on or after 1 April 2024. As a rule, subcontracted R&D and externally provided workers must be UK-based, with narrow exceptions where it is wholly unreasonable to replicate conditions in the UK (for example, geography or legal/regulatory barriers). Plan ahead – supply chain choices now affect eligibility.
The 20% credit and the 19% notional tax rate: what it means in practice
The merged scheme headline rate is 20%. Because the credit is taxable, the net impact depends on your corporation tax profile:
- Profit-making companies: You recognise the 20% credit above the line, then pay corporation tax on it. At the 25% main rate, the simple net benefit is typically around 15% of qualifying spend after tax. At 19%, it is c. 16.2%.
- Loss-making companies: HMRC applies a 19% notional tax to the credit when calculating the payable amount. This prevents loss-makers from receiving a more generous outcome than profit-makers at the same spend level.
This framing helps boards and audit committees understand why the cash outcome differs between group entities and years. It also underscores the need for accurate forecasting and early-stage project scoping, especially where you are deciding between the merged scheme and ERIS for an R&D-intensive SME.
Compliance first: The forms and deadlines you must meet
HMRC has introduced additional steps to lift claim quality and reduce errors. Failing any of these can invalidate or delay your claim, regardless of its technical strength:
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- Claim notification: First-time claimants, or those who have not claimed for three years, must notify HMRC of their intention to claim within six months of the end of the period of account. Build this step into your year-end timetable.
- Additional Information Form (AIF): You must submit a digital Additional Information Form before filing the CT600 that contains your claim. The AIF includes a named senior officer, agent details (if any), a breakdown of costs by category, and project descriptions.
- Project write-ups in the AIF:
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- 1-3 projects: describe all projects, covering 100% of qualifying costs.
- 4-10 projects: Describe at least three projects that together cover at least 50% of qualifying costs.
- 11+ projects: Describe a minimum of three and a maximum of ten projects that together cover at least 50% of qualifying costs.
These rules make documentation discipline non-negotiable. We recommend aligning finance, tax and engineering early each year to confirm eligibility, cost capture and AIF ownership.
Writing a technical narrative that stands up to enquiry
HMRC now expects concise, specific and technically grounded project descriptions. Treat the narrative as a formal record, not marketing copy:
- Baseline and advance: Define the starting point and the advance sought in science or technology, in the field – not just for your company. Avoid vague problem statements.
- Uncertainty: Explain the scientific or technological uncertainty that competent professionals could not easily resolve at the outset.
- Approach: Set out hypotheses, methods and iterations. Reference tests, prototypes and dead ends, not just the successful path.
- Competent professionals: Identify the roles and experience of the people who judged the uncertainty and directed the work.
- Direct and qualifying activity: Distinguish qualifying activity from routine work. For example, production runs, QA for standard products, or routine data cleaning generally do not qualify.
- Evidence: Keep contemporaneous records. Lab notes: dates and outcomes. JIRA tickets: purpose and results. Design reviews: what changed and why.
A clear technical narrative does two jobs – it supports the merged scheme calculation and reduces the risk of HMRC opening an enquiry. If an enquiry does arise, you will have the written evidence to address questions quickly.
Why act now, and how we can help
R&D remains a core lever for UK growth. The numbers bear that out: business-performed R&D reached £50 billion in 2023, with London, the East of England and the South East accounting for the largest regional shares (ONS, 2024). A well-prepared claim under the merged scheme can meaningfully offset development costs and smooth cashflow, but the compliance bar has risen.
If you are planning a claim for an accounting period in 2025/26, take these practical steps now:
- Project pipeline: Map projects that may qualify and decide early whether the merged scheme or ERIS gives the better outcome.
- Cost capture: Ensure payroll, purchasing and project codes align to the categories HMRC recognises.
- Overseas work: Review supplier locations and contracts in light of the post-April 2024 restrictions.
- AIF readiness: Nominate the senior officer and gather the data points HMRC requires well before the filing date.
- Narrative quality: Assign an owner to each project write-up and schedule technical reviews, not just finance checks.
We help clients scope eligibility, model cost-benefit, prepare the AIF, and draft technical narratives that answer HMRC’s questions. Read more about our taxation services and corporate tax planning, or explore our wider services.
If you want a clear, defensible R&D position under the merged scheme, get in touch and we will review your pipeline, numbers and narrative. If you are unsure how the merged scheme applies to your group, we can model the options and set out the exact steps and deadlines.