From 1 April 2024, UK companies claiming under the merged R&D scheme receive a 20% expenditure credit, which after Corporation Tax delivers a net benefit of ~15% (25% CT rate) or ~16.2% (19% CT rate). Loss-making, R&D-intensive firms can access Enhanced R&D-Intensive Support (ERIS), receiving a 14.5% cash credit and additional deductions.
What Changed in April 2024, and Why Does It Matter for Startups?
In April 2024, HMRC overhauled R&D tax relief. The old dual structure SME scheme and Research & Development Expenditure Credit (RDEC) was replaced with a single merged scheme.
- Merged Scheme: All companies now claim a 20% expenditure credit, recognised “above the line” in accounts. Because the credit is taxable, the net benefit equals 20% × (1 − CT rate). For firms taxed at the main rate of 25%, this equates to 15%; for companies at the small profits rate of 19%, it’s 16.2%.
- Enhanced R&D Intensive Support (ERIS): Under ERIS, loss-making, R&D-intensive SMEs can surrender losses for a 14.5% payable credit, alongside an additional 86% deduction, giving total enhanced expenditure of 186%.
This reform aimed to simplify claims, ensure fairness across company sizes, and curb abuse that cost the Exchequer over £4 billion in fraud and error between 2020–2023.
What Do “14.5%” and “15–16.2%” Relief Really Mean?
Many headlines confuse these rates. Here’s the precise breakdown:
- Profit-making companies:
- Claim 20% credit.
- Net benefit depends on Corporation Tax rate:
- 25% rate → 15% net.
- 19% rate → 16.2% net.
- Loss-making, R&D-intensive companies (ERIS):
- Claim a 14.5% payable credit.
- Receive an enhanced deduction of 86%, bringing total allowable expenditure to 186% of qualifying R&D.
- This can provide an effective cash benefit of up to ~27% of qualifying R&D expenditure for loss-making, R&D-intensive firms.
Example:
A loss-making AI startup spends £500,000 on eligible R&D.
- Under ERIS, it can receive £500,000 × 14.5% = £72,500 as a cash credit.
- With enhanced deductions, it may also offset losses, potentially reaching ~£135,000 total benefit over a quarter of its spend.
Who Qualifies for R&D Tax Relief?
HMRC defines R&D broadly but with strict criteria. To qualify, your project must:
- Seek a scientific or technological advance.
- Resolve scientific or technological uncertainty.
- Be systematically investigated (not just routine development).
Examples of Qualifying R&D for Tech Startups
- Developing machine learning algorithms to handle previously intractable datasets.
- Building low-latency data pipelines beyond known performance limits.
- Creating cybersecurity tools using novel cryptographic methods.
Non-Qualifying Work
- Cosmetic UI/UX improvements.
- Commercial risks (e.g., market demand).
- Routine use of established tools.
HMRC’s official definition of R&D is available on the gov.uk website.
What Does “R&D-Intensive” Mean?
R&D-intensive companies spend at least 30% of total expenditure on qualifying R&D. This threshold was reduced from 40% in 2024 to broaden eligibility.
- If your company qualifies as R&D-intensive and is loss-making, you may access ERIS.
- A grace period protects firms that dip below 30% for a single year but were intensive before.
What Costs Can Startups Include and What Changed in 2024?
Eligible Costs
- Salaries and NIC of R&D staff.
- Software licences and cloud computing.
- Consumables directly used in R&D.
- Subcontracted R&D (UK-based).
- Externally provided workers (EPWs).
Key Restrictions (Post-2024)
- Overseas subcontracting: Workers are only eligible where it is unreasonable to carry out the R&D in the UK, for example, due to geographical, environmental, or regulatory constraints.
- EPWs: Costs qualify only if subject to UK PAYE/NIC.
- Subcontracting rules: The company bearing financial risk and design responsibility claims, not the subcontractor.
For details, see HMRC’s merged scheme rules.
What Are the Compliance Requirements?
1. Additional Information Form (AIF)
From August 2023, all claimants must submit an AIF before filing their tax return. It includes:
- Contact details.
- Project descriptions.
- Cost breakdown.
2. Claim Notification
For first-time claimants or those who haven’t claimed in the past 3 years, HMRC requires advance notification within 6 months of the end of the accounting period.
3. Company Tax Return (CT600 + CT600L)
R&D credits are claimed through the Company Tax Return, specifically using the CT600L supplement.
Failure to comply with these requirements risks HMRC rejecting or delaying the claim.
What’s Driving HMRC’s Tighter Controls?
Between 2020 and 2023, HMRC estimated error and fraud in R&D tax relief at approximately £4.1 billion. It results in:
- Enhanced scrutiny introduced, requiring AIF and notification.
- Potential expansion of advance assurance schemes.
How Can Startups Maximise R&D Relief Safely?
Practical Steps
- Identify eligible activities early.
- Keep contemporaneous records (logs, code commits, sprint notes).
- Document technological uncertainty clearly.
- Engage specialist advisors to ensure compliance.
- File on time with full supporting evidence.
Common Mistakes
- Treating routine development as R&D.
- Missing the 6-month notification window.
- Claiming overseas costs without exceptions.
- Submitting vague narratives without demonstrating uncertainty.
Old vs New R&D Schemes
| Feature | SME Scheme (pre-2024) | RDEC (pre-2024) | Merged Scheme (2024–) | ERIS (2024–) |
| Relief type | 130–230% uplift | 13–20% credit (taxable) | 20% credit (taxable) | 14.5% payable credit |
| Net benefit | Up to ~26% | ~10–13% | 15–16.2% | ~27% (loss-making) |
| Overseas R&D | Often eligible | Limited | Restricted | Restricted |
| Claim process | CT600 + SME narrative | CT600L | CT600 + CT600L + AIF | CT600 + CT600L + AIF |
FAQs on R&D Tax Credits for Tech Startups
1. How much can my startup really claim?
Profit-making firms claim ~15–16.2% of qualifying costs. Loss-making, R&D-intensive firms may receive ~27%.
2. What is the deadline for claims?
Claims must be made within two years of the end of the accounting period. First-time or lapsed claimants must also notify HMRC within 6 months of the end of the period of account.
3. Can I claim for overseas developers?
Generally no, unless the work could not reasonably be done in the UK (e.g., environmental constraints).
4. Do software companies qualify?
Yes, provided the work involves resolving genuine technological uncertainty, not routine coding.
5. What happens if HMRC audits my claim?
You must provide detailed evidence of R&D. Inadequate documentation risks denial or repayment.
Conclusion
The UK’s R&D tax credit reforms of 2024–2025 fundamentally changed the landscape for startups. While the merged scheme delivers predictable 15–16.2% net relief, ERIS ensures cash flow support for loss-making, R&D-intensive firms.
For tech founders, the opportunity is substantial but so is the risk of error. Success depends on documenting real technological advances, meeting deadlines, and filing the correct forms. In practice, R&D tax relief can cover ~15 — 16.2% of costs under the merged scheme, and up to ~27% under ERIS for loss-making, R&D-intensive firms equivalent to roughly a quarter of qualifying spend.For tailored guidance and compliant support, explore professional advisory services such as those offered by OD Accountants.