From accounting periods beginning on or after 1 April 2024, most UK companies making R&D claims operate under a single regime: the merged R&D expenditure credit. This guide explains the mechanics, shows the net-of-tax arithmetic with a worked example for a software company, and sets out the two compliance steps every first-time claimant must not miss.
What the merged R&D scheme is
For accounting periods beginning on or after 1 April 2024, there is one R&D expenditure credit at 20%. It is an above-the-line, taxable credit and it replaces both the old SME super-deduction and the separate RDEC for those periods. Most companies, regardless of size, now use this single route. The 20% rate and the above-the-line taxable treatment are sourced from HMRC guidance on corporation tax R&D relief.
What changed and when
Before 1 April 2024, two separate R&D schemes ran in parallel. Smaller companies used the SME scheme, which gave an enhanced deduction against profits (the super-deduction). Larger companies used the Research and Development Expenditure Credit (RDEC). Both schemes had different rates, eligibility tests, and cashflow profiles. The merged scheme collapsed them into one above-the-line credit at 20%, available to companies of any size for qualifying expenditure in periods starting on or after 1 April 2024.
| Feature | Pre-1 April 2024 (old regime) | From 1 April 2024 (merged scheme) |
|---|---|---|
| Who it applied to | SME scheme for smaller companies; RDEC for larger companies | One scheme for most companies regardless of size |
| Headline rate | SME: enhanced deduction. RDEC: above-the-line taxable credit | 20% above-the-line taxable expenditure credit (gov.uk) |
| Is the credit taxable? | RDEC was taxable; SME deduction reduced taxable profits | Yes, taxable (see net-of-CT worked example below) |
| Treatment in accounts | SME: below the line. RDEC: above the line | Above the line (improves EBITDA presentation) |
The trigger for the merged scheme is the start date of the accounting period, not a calendar year. A company with a 31 March year-end entered the merged scheme from its period starting 1 April 2024. A company with a 31 December year-end entered from its period starting 1 January 2025.
How the 20% above-the-line taxable credit works
The 20% credit is earned on qualifying R&D expenditure and recognised in the income statement before the tax line, which is why it is called "above the line." Because the credit is taxable, the cash benefit a profitable company actually keeps depends on its corporation tax rate. Corporation tax is 19% on profits up to £50,000 and 25% on profits of £250,000 or more, with marginal relief between those thresholds.
- A company paying CT at the 25% main rate retains 75p of every £1 of credit (20p × 75% = 15p net benefit per £1 of qualifying spend).
- A company paying CT at the 19% small profits rate retains 81p of every £1 of credit (20p × 81% = 16.2p net benefit per £1 of qualifying spend).
- A loss-making company can carry the credit forward or, under certain conditions, surrender a portion for a payable cash credit (subject to PAYE/NIC caps).
The above-the-line treatment improves the company's reported EBITDA, which can be commercially useful when presenting accounts to investors.
Where the SME route survives: ERIS for loss-making R&D-intensive companies
Enhanced R&D Intensive Support (ERIS) is available to a loss-making SME whose qualifying R&D spend is at least 30% of its total expenditure. Such a company keeps the SME route: an 86% additional deduction plus a payable credit at 14.5%. Source: HMRC guidance on corporation tax R&D relief for SMEs. This is a meaningfully higher benefit than the merged scheme for companies that qualify, and it is specifically designed to support early-stage, deeply R&D-focused businesses burning cash in their build phase.
ERIS is a separate, more nuanced route with its own eligibility conditions. The full mechanics, the 30% intensity test, and worked examples are in the ERIS guide. If your company is pre-revenue or cash-burning, check whether ERIS applies before assuming the merged scheme is your route.
Worked example: a software company's merged-scheme claim
The figures below are illustrative. They use round numbers to show the arithmetic clearly. Your qualifying expenditure will depend on the specific activities, staff apportionment, and subcontractor treatment in your claim.
Scenario: A UK software company has qualifying R&D expenditure of £200,000 in its accounting period starting 1 April 2024. The expenditure consists of:
- Staff costs (salaries, employer NIC, pension contributions for R&D staff time): £150,000
- Cloud compute directly attributable to R&D projects: £30,000
- Externally provided workers and subcontractors (65% of invoiced cost, as only 65% of the cost of a connected subcontractor's work is ordinarily qualifying): £20,000
Total qualifying R&D expenditure: £200,000.
| Step | Amount |
|---|---|
| Qualifying R&D expenditure | £200,000 |
| Merged scheme expenditure credit at 20% | £40,000 |
| Credit is taxable: CT at 25% main rate on the £40,000 credit | (£10,000) |
| Net cash benefit after CT (25% rate) | £30,000 |
| Net benefit as a percentage of qualifying spend | 15% |
At the 19% small profits rate the CT charge on the credit would be £7,600 and the net benefit would be £32,400 (16.2% of qualifying spend). These figures assume the company is profitable. For loss-making companies, the credit reduces losses and may in some circumstances be surrendered for a payable amount, subject to the relevant rules and caps.
Cloud compute note: Cloud computing costs directly used in qualifying R&D (for instance, compute time running model training or stress-testing a novel algorithm) can be qualifying expenditure. General hosting costs for production systems are not qualifying. The distinction matters for software companies whose AWS or Azure bills blend R&D and production workloads. Apportion carefully and document the basis.
Subcontractor treatment: The merged scheme limits the qualifying amount for externally provided workers and subcontractors. For unconnected subcontractors, 65% of the payment is ordinarily qualifying. For connected subcontractors, the lower of the cost to the subcontractor or 65% of the payment to the subcontractor applies. Agency workers provided through a staffing company have separate treatment. Get the classification right before building your schedule.
Use the R&D relief estimator to run your own figures against these mechanics.
Does your software work actually qualify?
Qualifying R&D must seek an advance in science or technology and resolve genuine scientific or technological uncertainty. Routine software development does not qualify. Apply this test before building a claim; it is the single most important one. Source: HMRC Corporate Intangibles R&D Manual CIRD100000.
In practice, the question to ask for each piece of work is: could a competent professional in this field have resolved this problem by applying existing, publicly available knowledge and techniques? If yes, it is not qualifying R&D under HMRC's definition. The uncertainty must be technological, not commercial (whether customers will like it) or managerial (whether the team can deliver it on time).
Examples of work that commonly does qualify in software companies:
- Developing a novel algorithm or data processing architecture where the approach was not achievable using existing methods without experimentation
- Building a new compiler, runtime, or low-level system component that required resolving genuine technical unknowns
- Creating a machine learning model trained on a new domain where no existing, publicly available approach produced adequate results
Examples of work that commonly does not qualify:
- Building a standard web or mobile application to a known specification using established frameworks
- Integrating third-party APIs or services using documented methods
- Routine bug fixing, performance tuning within known parameters, or UI development
- Applying an existing machine learning model to a new business problem without modifying the underlying architecture
The software R&D eligibility guide goes through the HMRC tests in detail with worked examples specific to product and SaaS companies. Read it before building a project-level schedule.
The companies most exposed to HMRC challenge are those whose claims sweep in entire engineering salary bills without a project-level analysis of which work genuinely sought an advance. HMRC's compliance approach has tightened since 2023, and the Additional Information Form (below) is partly designed to surface exactly this kind of over-claim.
What to do next: two compliance steps you cannot miss
Before your R&D claim reaches the CT600, two mandatory steps apply for most claimants. Missing either invalidates the claim.
Step 1: claim notification within 6 months of period end
If your company is claiming R&D relief for the first time, or has not claimed in the previous three years, a claim notification must reach HMRC within 6 months of the end of the accounting period. Miss the window and the claim cannot be made for that period. Source: HMRC guidance on claim notification. The claim notification guide covers the exact process and the trap cases (including companies that took a year off claiming).
Step 2: Additional Information Form before the CT600
A detailed Additional Information Form (AIF) must be submitted to HMRC before the R&D claim on the CT600 is filed. Claims filed without a valid, accepted AIF are removed by HMRC on processing. Source: HMRC guidance on the AIF. The AIF requires a project-level description of each R&D project, the qualifying expenditure by category, and the names of the senior officer and any agent involved. The AIF guide walks through each section.
Build both into your claim timeline from the start of the accounting period, not at year-end when the CT600 deadline looms.
For a full claim review, see the R&D tax claims service. If your company is pre-revenue or loss-making and your R&D spend is a significant proportion of total costs, read the ERIS guide before deciding which route to pursue. Software and SaaS companies building on this hub will find the full R&D content set organised by claim stage.