The merged R&D scheme introduced for accounting periods beginning on or after 1 April 2024 replaced two separate regimes with a single above-the-line 20% credit. For most profitable SMEs that previously claimed under the enhanced SME deduction, this represents a reduction in effective benefit. For loss-making R&D-intensive companies, the Enhanced R&D Intensive Support scheme may actually be more generous than the old SME payable credit. The question is which box your company sits in.
What the Old SME Scheme Actually Delivered
Under the pre-April 2023 SME regime, a qualifying SME could deduct 230% of qualifying R&D expenditure from taxable profits. For a profitable company paying corporation tax at 19% (the rate before April 2023), this meant a net benefit of approximately £24.70 for every £100 of qualifying spend.
From April 2023, HMRC reduced the enhanced deduction rate to 186% for most SMEs and cut the payable credit rate for loss-making companies from 14.5% to 10%. This change, before the merger, already reduced SME benefits substantially.
The rates that applied from April 2023 to March 2024, for a non-intensive SME:
- Profitable company paying 25% CT: net benefit approximately 21.5p per £1 of qualifying spend (186% deduction multiplied by 25% CT rate less the 100% base deduction).
- Loss-making company surrendering loss: payable credit of 10% of qualifying spend, giving £10 per £100 of qualifying expenditure.
What the Merged Scheme Delivers from April 2024
The merged RDEC scheme provides a 20% above-the-line credit. This credit is taxable income. The net benefit after corporation tax at 25% is approximately 15p per £1 of qualifying spend for a profitable company.
For a loss-making company under the merged RDEC, the credit is still 20% but the company does not pay CT on it in the loss-making year. The credit first offsets any CT liability, then can be repaid in cash. For a loss-making company with no CT liability, the effective cash receipt is approximately 16.2p per £1 of qualifying spend, because the credit itself is not subject to CT in a loss-making year (the precise calculation depends on the interaction with the PAYE cap).
| Company type | Old SME scheme (Apr 23-Mar 24) | Merged RDEC (from Apr 24) | ERIS (if qualifying) |
|---|---|---|---|
| Profitable SME, 25% CT | ~21.5p per £1 | ~15p per £1 | Not available |
| Loss-making SME, non-intensive | 10p per £1 (payable credit) | ~16.2p per £1 (cash) | Not applicable (below 30%) |
| Loss-making SME, R&D intensive (30%+) | 14.5p per £1 (before Apr 23) | Not available | ~27p per £1 (ERIS payable credit) |
The table above is a simplified comparison. Individual circumstances, the PAYE cap, the treatment of connected parties, and the interaction with Innovate UK grants all affect the final figure. Use our eligibility checker for a more specific estimate.
Who Benefits from ERIS
Enhanced R&D Intensive Support is the replacement for the old enhanced SME payable credit. It is available to loss-making SMEs that are "R&D intensive", defined as having qualifying R&D expenditure of at least 30% of total expenditure in the accounting period (the threshold was 40% before April 2024).
Under ERIS, qualifying companies receive a 45% enhanced deduction plus a 14.5% payable credit on the loss surrendered. The effective net benefit is approximately 27p per £1 of qualifying R&D spend. This is materially better than both the merged RDEC rate and the old reduced payable credit of 10%.
To check whether you meet the 30% intensity threshold, calculate your total expenditure for the period and check whether qualifying R&D expenditure represents at least 30% of that total. Total expenditure for this purpose is the total of deductible revenue expenditure, not capital expenditure. See the HMRC ERIS guidance for the precise definition.
Practical example: pre-revenue SaaS company
A pre-revenue software company with £1.2 million of total expenditure of which £480,000 is qualifying R&D spend has an intensity ratio of 40%, which is above the 30% ERIS threshold. As a loss-making company, it can claim under ERIS. The effective cash benefit would be approximately £130,000, compared with approximately £72,000 under standard merged RDEC and £48,000 under the old reduced 10% payable credit. ERIS is a material difference for genuinely R&D-intensive early-stage companies.
Profitable SMEs: How Much Have They Lost
A profitable SME paying 25% corporation tax that previously claimed under the SME enhanced deduction has moved from approximately 21.5p per £1 of qualifying spend to approximately 15p per £1. That is a reduction of approximately 30% in the value of the claim per pound of qualifying expenditure.
On £300,000 of qualifying R&D expenditure, the difference between the old rate and the new rate is approximately £19,500 per year. That is a real reduction but it does not mean R&D claiming is no longer worth doing. A net benefit of 15p per £1 on genuine qualifying spend is still a meaningful return. The question is whether the quality of the claim preparation justifies the cost and effort.
For profitable SMEs, the above-the-line nature of the RDEC credit also has an accounting benefit. Unlike the old SME deduction, which reduced taxable profit below the line, the RDEC credit appears as income in the profit and loss account before the tax charge. This improves the appearance of EBITDA and can matter in fundraising or sale contexts.
The Overseas Subcontractor Change That Also Affects Value
Alongside the rate change, the merger brought in the overseas subcontractor restriction from April 2024. Under the merged scheme, the costs of subcontractors performing qualifying R&D outside the UK are not generally eligible, subject to a narrow exception.
For companies with offshore development teams, this change can reduce qualifying expenditure materially, compounding the rate reduction. A company that previously claimed 65% of £500,000 of offshore development costs would have included £325,000 of qualifying expenditure from that category. Under the merged scheme, that same cost is no longer eligible.
If your previous SME claims included substantial overseas subcontractor costs, the change to your qualifying expenditure base may be as substantial as the rate change itself. Check the qualifying expenditure guide for the current position.
Frequently Asked Questions
From April 2023, most SMEs could deduct 186% of qualifying R&D expenditure and receive a 10% payable credit on surrendered losses. Before April 2023, the deduction was 230% and the payable credit was 14.5%. The old rates were higher than the current merged RDEC rate for most profitable SMEs.
The merged RDEC scheme provides a 20% above-the-line credit. After corporation tax at 25%, the net benefit for a profitable company is approximately 15p per £1 of qualifying spend. This is lower than the old SME rate of approximately 21.5p per £1 for a company paying 25% CT.
ERIS is available to loss-making SMEs whose qualifying R&D expenditure is at least 30% of total expenditure. Qualifying companies receive an effective rate of approximately 27p per £1, which is more generous than both the merged RDEC rate and the old reduced SME payable credit.
The merged scheme applies to accounting periods beginning on or after 1 April 2024. If your period straddles that date, HMRC requires an apportionment of qualifying expenditure between the pre-April 2024 portion (old scheme) and the post-April 2024 portion (merged scheme).
The most material change is the overseas subcontractor restriction from April 2024, which removes the eligibility of costs for subcontractors doing R&D work outside the UK, subject to a narrow exception. The cloud computing and data licence categories added in April 2023 carry over into the merged scheme. The basic definition of qualifying R&D activities has not changed.
Understand Your Claim Under the Merged Scheme
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