The Merged Scheme and What It Means for SaaS
The merged R&D scheme, in force for accounting periods beginning on or after 1 April 2024, folded the old SME and RDEC reliefs into a single above-the-line credit at 20%. For SaaS companies, which have historically claimed under the SME scheme at higher effective rates, the change has three practical effects that a finance director needs to understand before modelling next year's claim.
First, the mechanism is now above the line. The credit appears in the profit and loss account as other operating income, which lifts reported EBITDA rather than reducing taxable profits. This has a knock-on effect on how investors and lenders read the accounts. It also changes the corporation tax calculation: the credit is taxable, so the headline 20% rate becomes approximately 15p per £1 net of corporation tax for a profitable company, as explained in our full merged scheme guide.
Second, overseas subcontractor and externally provided worker costs are now restricted. For a SaaS business that has historically used offshore delivery teams in Eastern Europe, South Asia or Latin America, most of that spend no longer counts. The statutory exception is narrow and covers regulatory, geographical or environmental necessity, not cost arbitrage. HMRC's view at CIRD84250 makes it clear that the decision to use an overseas party must not have been driven by cost.
Third, loss-making SaaS businesses that previously benefited from the old SME payable credit at rates between 18.6p and 26.97p per £1 have largely moved onto the lower merged-scheme rate, with ERIS as a higher-rate route for the most R&D-intensive. If R&D expenditure represents at least 30% of total expenditure in the period and the company is loss-making, ERIS delivers 27p per £1 rather than roughly 15p. For early-stage SaaS with a heavy engineering cost base and modest revenue, ERIS is often the single largest line item in the following year's cash flow plan.
What R&D Looks Like in a SaaS Business
HMRC's BIS Guidelines on the Meaning of Research and Development for Tax Purposes define qualifying R&D as work that seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty. For SaaS, the advance must be in the field of computer science or software engineering generally, not merely an advance for the claimant company. The uncertainty must be something a competent software professional could not readily work out from existing knowledge.
Examples of qualifying activity in SaaS typically include:
- Designing and testing novel data synchronisation, conflict resolution or event-sourcing architectures where existing approaches failed to meet performance, consistency or scale requirements.
- Building machine-learning inference pipelines that require bespoke model serving, quantisation or caching to meet cost or latency constraints a standard off-the-shelf stack could not deliver.
- Creating distributed search, indexing or retrieval systems where existing engines like Elasticsearch or Postgres full-text could not handle the cardinality, recency or relevance requirements without novel work.
- Engineering multi-tenant isolation patterns (row-level security, per-tenant schemas, dynamic sharding) where the standard frameworks left residual technical uncertainty about performance or data-leakage risk.
- Integrating legacy or proprietary protocols (FIX in capital markets, HL7 FHIR in healthcare, EDIFACT in logistics) where adapters, validators or translators had to be built rather than bought.
- Building novel UI and UX components where the underlying rendering, performance or accessibility problem was not solved by existing libraries (examples: real-time collaborative editing with CRDTs, WebGL-backed data grids over millions of rows).
- Engineering security and cryptography features that required primitive-level work: threshold signatures, zero-knowledge proofs, confidential computing, or custom post-quantum schemes.
- Developing developer-platform capabilities such as secure sandboxing, dynamic policy enforcement, or novel hot-reload or replay tooling where standard solutions introduced an unacceptable performance penalty.
- Building novel observability systems that sample, compress or fingerprint telemetry at a volume and cardinality existing APM vendors could not meet within the company's cost envelope.
- Producing significant performance work: 10x or greater improvements to query latency, throughput, or cost per transaction where the path required experimental approaches.
In each case the claim rests on the same three evidential points HMRC looks for at CIRD81900: a clear statement of the scientific or technological advance sought, a clear statement of the uncertainty that a competent professional could not readily resolve, and a description of the systematic work done to resolve it. An adviser will structure the project narrative around those three pillars.
What Does Not Qualify
Honesty about what does not qualify is the single biggest predictor of a defensible claim. HMRC's 2022 to 2023 Annual Report identified software as one of the sectors with the highest error and fraud rate. The sector has since moved to mandatory pre-claim notification and the Additional Information Form precisely because too many claims included work that was routine commercial development dressed up as R&D. Common false positives include:
- Routine UI styling changes, visual refreshes and Figma-to-React component implementation using standard libraries.
- Configuration and integration work on off-the-shelf SaaS platforms (Salesforce, HubSpot, Stripe, Segment) where the work is setup rather than technical advance.
- Content management, copy changes and marketing site development.
- Bug fixing, routine maintenance and security patching where the fix is straightforward for a competent developer.
- Standard CRUD application development using established frameworks (Rails, Django, Laravel, Spring) without an underlying technical advance.
- Market research, user research, design-thinking workshops and product discovery work that precedes technical development.
- Translation and localisation, unless it involves novel linguistic or technical work.
- Server provisioning, CI/CD pipeline setup and DevOps work that relies on mature tooling without an advance in the field.
- Writing integrations against well-documented public APIs.
- Porting an application to a new language or platform where the problem is known to be solvable.
A good adviser will exclude this spend from the claim rather than include it and hope. HMRC's enquiry rate on software claims has risen sharply since 2022, and a claim that includes non-qualifying work is harder to defend than a narrower one built around genuinely uncertain technical projects.
Qualifying Costs for SaaS Under the Merged Scheme
Once the qualifying activity is established, the claim is built from allowable cost categories. For SaaS, the practical pool typically comprises:
Staffing costs. Gross salary, employer National Insurance and employer pension contributions for UK employees working directly on qualifying R&D, apportioned by the percentage of their time spent on that work. A senior engineer at 80% R&D time contributes materially more than a junior at 30%, and the time apportionment should be evidence-backed rather than a round number.
Externally provided workers (EPWs) and subcontractors. Under the merged scheme, these costs must relate to work performed in the United Kingdom. The 65% haircut applies to unconnected subcontractor payments under CIRD84200. Offshore development teams are almost always excluded. Onshore contractors from UK agencies supplying UK-resident engineers remain claimable.
Consumables. For pure-software SaaS this category is typically small but it can include items such as test hardware, developer laptops directly consumed in qualifying R&D activity (subject to capital vs revenue rules), and power and heat for on-premise labs or test rigs where relevant.
Software licences. Development tool licences used directly in R&D (JetBrains, JIRA in some cases, testing frameworks, profiling tools) are claimable, apportioned to R&D use.
Cloud computing and data costs. From April 2023 onwards, the cost of cloud compute, storage and data licences used directly in qualifying R&D is allowable. For a modern SaaS stack this is often the second-largest line after staffing. It typically includes AWS, GCP or Azure spend on development, staging and integration-test environments, plus data sets purchased or licensed specifically to train or test ML models. Production hosting that serves the live commercial service does not qualify.
A worked discussion of the cost pool, including the apportionment rules for staff and cloud, appears in our guide to qualifying R&D expenditure.
HMRC Enquiry Risks Specific to SaaS
HMRC's R&D compliance team has published several areas of concern that map directly onto typical SaaS claim errors. Based on CIRD81900 guidance, recent tribunal decisions, and the 2024 Approach to R&D Tax Reliefs paper, the following are the most common enquiry triggers:
- Generic project descriptions. Narratives that describe what the product does rather than what the technical uncertainty was. HMRC's officers are trained to look for a specific advance and a specific uncertainty, not marketing copy.
- Overseas subcontractor spend post-April 2024. Claims that continue to include offshore development without clear statutory-exception reasoning are a focus of enquiry activity.
- 100% R&D time for non-technical staff. A CFO, a marketing lead or a sales engineer rarely sits at 100% R&D time. Claims with such apportionments are routinely challenged.
- Cloud cost allocation. Claiming all AWS spend is a common error. Only cloud used directly in qualifying R&D is allowable, with production serving explicitly excluded.
- R&D intensity calculations for ERIS. HMRC checks the denominator carefully. Misclassifying cost of sales or excluding certain overheads to cross the 30% threshold is a material error.
- Contracted-out R&D. The merged scheme changed the rules on who claims when R&D is contracted out. A SaaS company that develops a product for a named enterprise customer should have its contracts reviewed to confirm that the SaaS company, not the customer, is entitled to the claim.
Indicative Claim Ranges for SaaS
HMRC's R&D Tax Credit Statistics (September 2024 publication, covering 2022 to 2023 claims) show the Information & Communication sector as the single largest claimant sector by number of claims. The average SME claim in the sector sits around £57,000, though the distribution is heavily skewed: a significant minority of claims exceed £200,000 and a small number exceed £1 million. A rough rule of thumb for SaaS finance directors:
| Stage | Engineers | Typical R&D spend | Indicative claim value |
|---|---|---|---|
| Seed | 3 to 8 | £250k to £600k | £25k to £60k (or ERIS £45k to £160k) |
| Series A | 8 to 20 | £600k to £1.6m | £60k to £180k (or ERIS £160k to £400k) |
| Series B | 20 to 60 | £1.6m to £5m | £160k to £550k (ERIS less likely) |
| Growth / profitable | 60+ | £5m+ | £550k+ (net of CT) |
These figures are indicative only and depend on the R&D proportion of engineering time, the split between UK and offshore, and the proportion of cloud cost that is directly R&D. The only way to generate a realistic number is a cost-level review.
Indicative Example: A Series A B2B SaaS
A B2B SaaS company with a UK headcount of 18 engineers, 3 product managers and 4 go-to-market staff has total expenditure of £2.8m for the year to 31 March 2026. The company is loss-making, runs a single AWS account for development and production, and contracts two senior engineers through a UK-resident agency.
A specialist review identifies £1.05m of qualifying R&D spend: £780k of UK engineering salary and associated costs apportioned at 70% to 90% of time on three genuinely novel projects (a real-time collaboration engine, a proprietary data-sync protocol, and a low-latency inference pipeline), £110k of UK agency contractor cost, and £160k of cloud spend allocated to development, staging and ML training environments.
R&D intensity: £1.05m / £2.8m = 37.5%. The company is loss-making and above the 30% threshold, so ERIS applies. The credit is £1.05m x 27% = £283,500, of which a substantial portion may be received as a cash payment from HMRC (subject to the PAYE cap and statutory adjustments).
Had the company relied on an overseas development partner for £250k of work, that spend would have been excluded under the merged scheme's UK-only rule. The difference between a compliant UK-only claim and an incorrect inclusion of offshore spend is material.
Next Steps for Your SaaS Company
The fastest way to know whether your current period qualifies, and roughly what it is worth, is a 15-minute assessment call. Our specialists have handled hundreds of software claims and will be candid about whether a claim is worth pursuing on the facts you describe.
If you already have an accountant, they stay in the loop. We brief them, share the draft numbers for cross-check, and make sure the corporation tax filing and Additional Information Form sit together. We do not chase work that is not there.
For context on adjacent relief areas, you may find these related guides useful: R&D tax credits for loss-making companies, Innovate UK grants and R&D tax credits, and the HMRC Additional Information Form.