R&D tax credits for UK startups: how the current scheme actually works

The UK’s R&D tax relief system changed fundamentally for accounting periods beginning on or afterundefinedApril 2024: the two previously separate schemes, the SME scheme and the R&D Expenditure Credit (RDEC) scheme for larger companies, were merged into a single scheme for almost all companies, alongside a distinct, more generous regime for the smallest, most R&D-intensive loss-making businesses. A startup founder relying on an older guide that still describes “SME R&D relief” as a separate, more generous scheme available to all small companies is working from rules that no longer apply.

What is the merged R&D scheme, and how does it work?

The merged scheme gives qualifying companies of any size an “above the line” R&D expenditure credit, calculated as a percentage of qualifying R&D spend, that is treated as taxable income in the company’s accounts rather than as a deduction, which is a structural change from how the old SME scheme worked. Because the credit itself is taxable, the actual net cash benefit to a profitable company paying the current rate of corporation tax works out lower than the headline credit percentage, while a loss-making company can generally claim the credit as a payable cash amount after offsetting other tax liabilities, subject to a cap linked to the company’s PAYE and National Insurance contributions. This single merged scheme is now the default route for the great majority of UK companies claiming R&D relief, whether they are small startups or large, established businesses.

What is Enhanced R&D Intensive Support (ERIS), and who actually qualifies?

ERIS is a separate, more generous scheme that sits alongside the merged scheme, aimed specifically at loss-making small and medium-sized companies that spend a high proportion of their total expenditure on qualifying R&D. To qualify, a company must be loss-making for the relevant accounting period and must meet an R&D intensity threshold, spending at least 30% of its total expenditure on qualifying R&D, a threshold that was itself reduced from an earlier, higher level to bring more companies into scope for accounting periods beginning on or afterundefinedApril 2024. A company that qualifies for ERIS claims relief closer in structure to the old SME scheme, an enhanced deduction against its taxable profits (or, since it is loss-making, against its loss) which it can then surrender for a payable cash credit, and because ERIS give a materially higher effective cash benefit than the standard merged scheme, most early-stage, pre-revenue or early-revenue UK startups spending heavily on product development are likely to be better off under ERIS than the standard merged scheme, provided they meet the intensity threshold.

The two schemes compared

	Merged R&D scheme	Enhanced R&D Intensive Support (ERIS)
Who it’s for	Most companies, profitable or loss-making	Loss-making SMEs spending at least 30% of total expenditure on qualifying R&D
How relief is structured	Above-the-line taxable expenditure credit	Enhanced deduction, surrendered for a payable credit if loss-making
Typical effect	Lower net benefit for profitable companies once tax on the credit is applied	Higher effective cash benefit, generally more valuable for R&D-heavy loss-making startups
Effective from	Accounting periods beginning on or after 1 April 2024	Accounting periods beginning on or after 1 April 2024

Because the two schemes are structured so differently, it is not simply a case of “the better rate wins”; a company’s actual entitlement depends on whether it meets the ERIS intensity threshold at all, and R&D intensity is measured against a company’s total expenditure, so it is worth calculating this carefully, ideally with an adviser, rather than assuming eligibility either way.

What actually counts as qualifying R&D spend?

Qualifying expenditure generally covers staff costs for people directly engaged in resolving scientific or technological uncertainty, a proportion of subcontracted R&D costs, consumable items used up in the R&D process, and costs of software and, within limits, data and cloud computing used directly in R&D activity. The underlying test, whether the work involved seeking an advance in science or technology by resolving genuine scientific or technological uncertainty that a competent professional in the field could not readily have worked out, has not changed with the scheme merger, and it remains the main area where genuine, good-faith claims can still be challenged or reduced by HMRC if the work does not clearly meet that bar. It is worth keeping contemporaneous records of what technical uncertainty a project was addressing and how, rather than reconstructing the justification only when a claim is being prepared, since HMRC has increased scrutiny of R&D claims in recent years and expects a clear technical narrative alongside the numbers.

What has changed procedurally, not just financially?

Alongside the rate and structure changes, HMRC has tightened the claims process itself: companies claiming R&D relief for the first time, or that have not claimed in the preceding three years, generally need to submit a claim notification form in advance, and every claim now needs an additional information form setting out the technical detail of the R&D undertaken, submitted before or alongside the company’s tax return. Missing these procedural steps, rather than getting the underlying technical case wrong, has become one of the more common reasons genuine claims are rejected or delayed, so it is worth building the notification and additional information requirements into a company’s claims timeline rather than treating them as an afterthought.

What should a startup founder actually do?

Because R&D intensity, profitability and the specific technical nature of a company’s work all determine which scheme applies and what it is actually worth, it is worth having a specialist R&D tax adviser or accountant assess a specific company’s position rather than assuming either the standard merged rate or the more generous ERIS rate automatically applies. It is also worth checking a company’s position every accounting period rather than once, since moving in or out of loss-making status, or a change in R&D intensity as the business scales revenue, can change which scheme it qualifies for from one year to the next.

How does an R&D claim interact with other funding a company has already received?

Grant funding and certain other forms of state support can affect how a company’s R&D expenditure is treated for tax relief purposes, because rules exist to prevent the same underlying cost effectively receiving double public support, so a company that has already received a grant, for example from Innovate UK, towards a specific R&D project needs to check carefully which relief regime applies to that project’s costs rather than assuming both are automatically fully available together. This has historically been an area of genuine complexity where the rules have differed depending on the type of grant and whether it was classed as notified state aid, and it is a common area where an otherwise well-prepared claim runs into trouble, so it is worth flagging any grant funding received to an R&D tax adviser at the point a claim is being prepared, not after it has been submitted.

Where to check the current position

Because R&D tax relief has changed substantially and repeatedly over recent years, and because the qualifying tests are applied to a company’s specific facts, it is worth checking the live GOV.UK guidance on Corporation Tax R&D relief directly, and taking advice from a specialist R&D tax adviser, before relying on any rate or threshold in this article, or in older material that may still describe the pre-2024 SME and RDEC schemes as if they were still the current system.