Definition
The enhanced deduction worked by increasing the tax deduction for qualifying R&D spend. A company with £100,000 of qualifying costs could deduct £230,000 against its profits, or £186,000 from April 2023. For a profitable company paying corporation tax at 19%, a £230,000 deduction on £100,000 of spend generated a net saving of £43,700 (£130,000 additional deduction at 19%). This equates to an effective benefit of approximately 43.7% of the qualifying costs at the old 19% CT rate.
For loss-making companies, the additional deduction deepened the loss. That loss could be surrendered to HMRC in exchange for a cash credit at a rate of 14.5% of the surrenderable loss (until April 2023, then reduced for non-intensive companies). The uplift rate entry covers the rate history in more detail.
How it compared to RDEC
During the period when both schemes ran in parallel, larger companies and those that did not meet SME criteria used the Research and Development Expenditure Credit (RDEC), which was an above-the-line credit rather than an enhanced deduction. The key difference is that RDEC is included in the profit computation as income, which makes it more visible on management accounts. The enhanced deduction reduces a cost without generating a separate credit line. From 1 April 2024, the merged scheme moves all companies to an RDEC-style mechanism, eliminating the enhanced deduction going forward.
Relevance for current claims
The enhanced deduction is now a legacy concept, but it remains relevant in two contexts. First, companies with accounting periods ending before 1 April 2024 (or straddling periods with a pre-April 2024 slice) may still be claiming or defending claims under the old rules. Second, enquiries opened by HMRC on legacy-period claims will be assessed against the old legislation. Understanding the enhanced deduction is therefore still necessary for anyone dealing with claims from 2022 or 2023 accounting periods.
See the merged scheme guide for a comparison of the two regimes.
Common mistakes
The most common mistake is applying the old rates to new periods. A claim for a period starting on or after 1 April 2024 should use the merged-scheme 20% credit, not the legacy enhanced deduction. A second mistake is confusing the gross deduction percentage (230%) with the net economic benefit. The benefit depends on the corporation tax rate applied to the additional deduction, which varied depending on whether the company was profitable or loss-making and what CT rate applied.