The Merged R&D Scheme In 2026/27: Rates, Rules And Who Wins Or Loses
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The Merged R&D Scheme in 2026/27: Rates, Rules and Who Wins or Loses
For accounting periods beginning on or after 1 April 2024, and fully in force through 2026/27, most UK companies claim Research and Development (R&D) tax relief through a single merged scheme offering a 20% taxable expenditure credit, while loss-making, R&D-intensive small and medium-sized enterprises (SMEs) can instead claim Enhanced R&D Intensive Support (ERIS), worth up to 14.5% of a surrendered loss on an enhanced 186% deduction. HMRC's own guidance on the merged scheme and ERIS confirms these are now the only two routes available, having replaced the old SME scheme and the classic Research and Development Expenditure Credit (RDEC) entirely.
The reform simplified the rulebook, but it did not make the outcome simpler for everyone claiming relief. Some businesses are genuinely better off than they were under the pre-2024 rules. A meaningful number, particularly loss-making SMEs that fall just short of the R&D intensity threshold, are worse off, and the change has been quiet enough that I still meet directors assuming they qualify for benefits that no longer exist in the form they remember.
How the Merged Scheme Actually Works
The merged scheme applies a 20% expenditure credit to qualifying R&D costs, calculated above the line, meaning it appears as taxable income in the company's accounts rather than as a simple deduction from taxable profit. Because the credit itself is subject to Corporation Tax, the net cash benefit for a profitable company depends on the rate of tax it pays. For a company on the main 25% Corporation Tax rate, the net benefit works out at roughly 15% of qualifying expenditure. For a smaller company still within the 19% small profits rate, or one benefiting from marginal relief between the £50,000 and £250,000 profit thresholds, the net benefit after tax is somewhat higher, since less of the credit is clawed back through Corporation Tax.
This above-the-line treatment matters beyond the arithmetic. Because the credit is recognised as income before tax rather than buried as a below-the-line deduction, it improves reported operating profit, which can matter when a business is preparing accounts for a lender, an investor, or a prospective buyer. That was one of the original attractions of the old large-company RDEC scheme, and the merged scheme carries the same feature through to companies of every size.
A Worked Example: A Profitable Engineering Company
Take a manufacturing business with qualifying R&D expenditure of £280,000 in its 2026/27 accounting period, developing a new production process. Under the merged scheme, it receives a taxable credit of £56,000 (20% of £280,000). Assuming the company pays Corporation Tax at the 25% main rate, the credit itself generates a tax charge of £14,000, leaving a net cash benefit of £42,000, or exactly 15% of the qualifying spend. Five years ago, the same expenditure incurred by an SME under the old rules would have generated a considerably larger benefit through the 130% enhanced deduction that applied before April 2023. That comparison is precisely why some directors feel the merged scheme has quietly reduced what they can claim, even where the headline process looks broadly similar.
Developed by Pro Tax Accountant, this interactive tool guides UK companies through the merged R&D tax relief regime and Enhanced R&D Intensive Support (ERIS) in force for the 2026/27 financial year. It instantly assesses your scheme eligibility based on the statutory 30% R&D intensity threshold, models your expected net cash benefit or tax credit, and highlights critical changes surrounding contracted-out work and overseas expenditure. To use the widget, simply enter your qualifying R&D spend, total operational costs, and profitability status into the calculator tab, or explore the rules and comparison tabs to identify whether your business stands to gain or lose under HMRC's merged scheme framework.
ERIS: Who Actually Qualifies, and Why It Is More Generous
Enhanced R&D Intensive Support exists specifically for loss-making SMEs where R&D expenditure represents at least 30% of total expenditure for the period, a threshold reduced from 40% when the scheme was introduced. Qualifying companies can deduct an extra 86% of their R&D costs on top of the standard 100% deduction already reflected in their accounts, producing a total deduction of 186%, and can then surrender the resulting trading loss for a payable, non-taxable credit worth 14.5% of the amount surrendered. Combined, this produces an effective benefit of around 27p for every pound spent on qualifying R&D, considerably more generous than the roughly 15p available under the merged scheme.
A one-year grace period softens the cliff edge at the 30% threshold. If a company qualified for ERIS in one period but its R&D intensity dips below 30% the following year, it can generally continue claiming ERIS for that single transitional year, provided it met the threshold and successfully claimed the year before, rather than being pushed straight back onto the less generous merged scheme rate. Eligibility is assessed period by period, so a company can move between the merged scheme and ERIS more than once over its lifetime as its spending pattern changes, and connected companies are taken into account when calculating whether the intensity threshold is met, regardless of whether those connected entities are based in the UK.
A Worked Example: A Loss-Making Biotech SME
Take an early-stage diagnostics company with total expenditure of £900,000 for the period, of which £310,000, just over 34%, relates to qualifying R&D activity, and the company is loss-making. Under ERIS, the enhanced deduction adds a further £266,600 (86% of £310,000) to the £310,000 already reflected in the accounts, increasing the trading loss available to surrender by £576,600 in total. Surrendering that amount produces a payable credit of £83,607 (14.5% of £576,600), paid in cash and not itself subject to Corporation Tax. Had the same company fallen just under the 30% intensity threshold, it would instead have claimed under the merged scheme, receiving a taxable 20% credit on its £310,000 of qualifying spend, worth considerably less after the notional tax charge applied to loss-making companies claiming under that route.
Who Wins and Who Loses Under the Merged Regime
This is the question most business owners actually want answered, and the honest answer depends heavily on which side of the ERIS threshold a company sits on.
Large companies and profitable businesses of every size are broadly better off than under the old dual system. The classic RDEC rate for large companies stood at 13% before the reforms, producing a net benefit after tax of roughly 10.5%. The merged scheme's 20% rate, even after the higher notional tax charge, produces a net benefit closer to 15%, a genuine improvement.
Loss-making SMEs that clear the 30% R&D intensity bar are also relatively well protected. ERIS was specifically designed to preserve something close to the benefit levels that applied to intensive SMEs before the 2023 reduction in the old SME scheme's enhancement rate, and at roughly 27p per pound spent, it broadly succeeds in that aim.
The clear losers are loss-making SMEs that spend a meaningful amount on R&D but fall short of the 30% intensity threshold. Before the reforms, any loss-making SME, regardless of intensity, could claim a payable credit under the old SME scheme. Now, a loss-making SME below the 30% threshold is pushed onto the merged scheme, where the credit is taxable and the notional tax charge applied to loss-making claimants under that route reduces the net benefit considerably compared to the old regime's 10% to 14.5% payable rate on a much larger enhanced deduction.
A software company spending 22% of its costs on genuine R&D, still a substantial commitment by most measures, now receives a materially smaller cash benefit than an equivalent company would have received before April 2023, simply because it falls on the wrong side of an intensity ratio that has nothing to do with the quality or value of the R&D itself.
Companies that previously relied on subsidised or grant-funded R&D have also gained something under the merged rules. The old subsidised expenditure restriction, which reduced relief where R&D costs were met by a grant, has not been carried forward into the merged scheme, meaning grant-funded R&D can now be claimed in full where it otherwise qualifies, which is a genuine improvement for businesses that combine innovation grants with their own R&D spending.
Merged R&D Scheme 2026/27: Rates, Rules, Winners and Losers Table
Scheme / Business Category | Rates & Financial Relief | Key Rules & Requirements | Impact (Who Wins or Loses) |
Merged Scheme (New RDEC) - Standard / Profitable & Loss-Making Companies | Above-the-line taxable credit (rate historically increased to 20% under pre-merger RDEC). Net benefit varies depending on corporation tax rate after running through the 7 payment steps. | Applies to accounting periods beginning on or after 1 April 2024. Claims require an Additional Information Form (AIF), pre-notification within 6 months of period end (unless prior claim exception applies), and compliance with overseas spend restrictions (CTA09/s1138A) & contracted-out rules (CTA09/s1133). Going concern condition stops payment if breached. | Provides a unified framework for large businesses and standard SMEs. Entities with heavy overseas contractor costs or without active UK operations lose out unless specific narrow exceptions apply. |
Enhanced R&D Intensive Support (ERIS) - Loss-making R&D-Intensive SMEs | Additional tax deduction of 86% on qualifying expenditure plus a surrendered loss tax credit of 14.5% (effective cash relief of up to 26.975%), subject to the PAYE cap. | Company must meet the 30% R&D intensity condition across all connected companies globally. Must be a loss-making SME and a going concern (going concern breach stops the claim entirely). Subject to PAYE cap (£20,000 + 300% of PAYE/NIC) where restricted amounts cannot be carried forward. | Loss-making, highly R&D-focused SMEs win significantly higher financial relief. Small-payroll firms capped by PAYE rules lose unused credit benefits compared to the Merged Scheme. |
Northern Ireland ERIS Claimants | Access to ERIS rate structures without standard overseas restrictions on contractors/EPWs, but subject to State aid caps. | Subject to a 3-year de minimis State aid limit on the additional benefit amount above standard Merged Scheme RDEC levels. | Northern Ireland SMEs using overseas talent win exemption from overseas cost restrictions, but are capped by EU de minimis State aid limits. |
Subcontractors & Contractors (Contracted-Out R&D) | Unconnected contractor spend standard relief calculated at 65% of relevant qualifying costs. | The party initiating and contemplating the R&D generally claims (CTA09/s1133). Ineligible entities (charities, universities, health bodies) cannot claim, allowing the commercial subcontractor to claim directly in those cases. | Commercial subcontractors working for ineligible entities (universities/charities) or overseas clients win the right to claim directly; subcontractors hired by UK corporate clients who intended the R&D lose the claim to the customer. |
Subcontracting: The Rule That Catches People Out
The most significant practical change for businesses that carry out contracted-out R&D concerns who is actually entitled to claim. Under the new rules, where it is reasonable to assume that a customer intended or contemplated that R&D of a particular kind would be needed to fulfil a contract, the customer, not the contractor carrying out the work, is generally the party entitled to claim relief on that R&D. This reverses the practical effect of the old SME rules, under which a subcontractor delivering genuine R&D work for a client could often claim relief itself.
The test turns on whether the customer genuinely understood and specified the R&D required, not merely on who happened to carry out the technical work. Where a customer commissions a straightforward product or service and has no real visibility into the R&D a supplier chooses to undertake to deliver it, the supplier may still be treated as carrying out its own in-house R&D and remain entitled to claim. This distinction is genuinely fact-sensitive, and I would strongly advise any business regularly working as a technical subcontractor to review its standard contracts against this test specifically, since the wording of the agreement itself, and the degree of technical direction the customer actually exercises, now has direct tax consequences that did not exist under the old rules.
Overseas Costs: Generally No Longer Eligible
For accounting periods beginning on or after 1 April 2024, expenditure on overseas subcontractors and externally provided workers based outside the UK is, in most cases, no longer eligible for relief at all, regardless of scheme. The stated policy objective is to concentrate the incentive on R&D activity that generates economic benefit within the UK.
Narrow exceptions exist where specific conditions necessary for the research, geographical, environmental, social, or regulatory factors that genuinely cannot be replicated in the UK, are only present overseas, but the exception is deliberately tight, and cost alone is explicitly not an acceptable justification. A pharmaceutical company running a clinical trial that requires a specific overseas population, for example, may still qualify for the relevant overseas element. A software company simply choosing an overseas development team because it is cheaper will not.
This interactive guide explains the UK’s Merged R&D Scheme and Enhanced R&D Intensive Support (ERIS) that apply for accounting periods beginning on or after 1 April 2024 and remain fully in force through 2026/27. It sets out the current rates, who is better or worse off under the new rules, the key changes around subcontracting and overseas costs, and the essential compliance deadlines. Use the tabs at the top to move between Overview & Rates, ERIS, Who Wins or Loses, Key Rules, the Quick Calculator and the Action Checklist; expand any accordion section for further detail and try the calculator for a simple illustrative estimate of potential benefit.
Claim Notification and the Additional Information Form: Two Separate Compliance Traps
Two procedural requirements, introduced just before the merged scheme itself, now determine whether an otherwise valid claim is even accepted. First, companies making a first-time claim, or whose last claim was made more than three years before the relevant deadline, must submit a claim notification form within six months of the end of the relevant period of account. Missing this window invalidates the claim entirely, with no discretion for HMRC to accept a late submission outside a handful of narrow, published administrative easements.
Second, every claim, regardless of whether notification was required, must be supported by an additional information form submitted before or alongside the Company Tax Return, setting out project details, qualifying costs, and adviser information. This requirement has applied since August 2023 and catches out claimants just as often as the notification deadline, particularly where a claim is prepared close to the filing deadline and the additional information form is treated as an afterthought rather than a prerequisite. HMRC's guidance on completing the Company Tax Return confirms that the return itself requires specific boxes to be marked to confirm both forms have been submitted, and a return submitted without them will not be accepted as a valid claim.
Scotland, Wales, and Northern Ireland
Corporation Tax, and R&D tax relief specifically, is reserved to the UK government, so the merged scheme and ERIS apply identically to qualifying companies in Scotland, Wales, and England, with no separate devolved version of either regime. Northern Ireland is the genuine exception here, not because of devolution in the usual sense, but because of post-Brexit subsidy control obligations under the Windsor Framework.
Companies with a registered office in Northern Ireland claiming ERIS fall under specific Northern Ireland ERIS provisions, since the relief is treated as de minimis State aid subject to a capped amount over a rolling three-year period, varying by sector, and NI-registered companies must make a formal declaration confirming that cap has not been exceeded. A Northern Ireland company can, in certain circumstances, opt out of these specific provisions, but this is a genuinely separate compliance layer that does not apply to businesses registered in Scotland, Wales, or England.
Practical Steps Worth Taking
● Calculate your R&D intensity precisely, including connected company expenditure, before assuming which scheme applies, since falling just under the 30% threshold materially changes the value of the relief.
● Review subcontractor and customer contracts against the new "contracted out" test, since the right to claim now depends on who specified and understood the R&D required, not simply on who carried it out.
● Confirm any overseas contractor or externally provided worker costs against the narrow exceptions before including them in a claim, since cost savings alone will not justify relief on non-UK expenditure.
● Diarise the claim notification deadline separately from the tax return deadline itself, six months after the end of the relevant period of account, and treat it as a hard cut-off with essentially no room for a late submission.
● Prepare the additional information form as an integral part of the claim process, not a final administrative step, since a return submitted without it will not be treated as a valid R&D claim.
Key Takeaways
The merged scheme has genuinely simplified the rulebook for most companies, and large and mid-sized profitable businesses are, in most cases, better off than under the old dual system. The real complexity now sits in the edges: the 30% intensity threshold that determines whether a loss-making SME gets 15p or 27p per pound spent, the contracted-out R&D test that has quietly shifted who is entitled to claim on shared projects, and two separate procedural deadlines that can invalidate an otherwise sound claim regardless of the underlying R&D's genuine quality.
Frequently Asked Questions
What is the current rate of R&D tax relief for 2026/27?
Most companies claim under the merged RDEC scheme, which gives a 20% taxable expenditure credit, producing a net cash benefit of roughly 15% after Corporation Tax for a profitable company. Loss-making SMEs meeting the R&D intensity test can instead claim under ERIS, worth up to 14.5% of a surrendered loss on an enhanced 186% deduction.
What counts as an R&D-intensive SME for ERIS purposes?
A loss-making SME whose qualifying R&D expenditure represents at least 30% of its total expenditure for the accounting period, a threshold reduced from the original 40% figure. Connected companies are taken into account when calculating this ratio.
What happens if my company's R&D intensity drops below 30% after previously qualifying for ERIS?
A one-year grace period generally applies, allowing continued ERIS claims for a single transitional year, provided the company met the threshold and made a successful claim in the preceding year. If intensity remains below 30% for a second consecutive year, the company reverts to the merged scheme.
Can a subcontractor still claim R&D tax relief for work done under a client contract?
Generally, only if the customer did not genuinely understand or specify the R&D required to fulfil the contract. Where the customer did contemplate that specific R&D would be needed, the customer, not the subcontractor, is usually the party entitled to claim.
Are overseas R&D costs still eligible for relief?
In most cases, no. For accounting periods beginning on or after 1 April 2024, expenditure on overseas subcontractors and externally provided workers is generally excluded, with narrow exceptions only where specific conditions genuinely cannot be replicated in the UK. Cost is explicitly not an acceptable justification for the exception.
Do I need to notify HMRC before making an R&D claim?
Yes, if this is your first claim, or your last claim was made more than three years before the notification deadline. The claim notification form must be submitted within six months of the end of the relevant period of account, and missing this deadline generally invalidates the claim entirely.
What is the additional information form and is it always required?
It is a mandatory submission, in force since August 2023, setting out project and cost details to support every R&D claim, regardless of whether claim notification was also required. It must be submitted before or alongside the Company Tax Return, and a return without it will not be accepted as a valid claim.
Is R&D tax relief different in Scotland or Wales?
No. Corporation Tax and R&D relief are reserved matters, so the merged scheme and ERIS apply identically across Scotland, Wales, and England, with no separate devolved regime.
Why does Northern Ireland have different R&D rules?
Northern Ireland-registered companies claiming ERIS are subject to specific additional provisions relating to post-Brexit subsidy control obligations, since the relief is treated as de minimis State aid subject to a capped amount over a rolling three-year period. This does not apply to companies registered in Scotland, Wales, or England.
About the Author:
Adil Akhtar, ACMA, CGMA, FCMA (membership ID is 990250923) serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than eighteen years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants (registered with Companies House), combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
Disclaimer: This article sets out the general position under UK tax law for the 2026/27 tax year. The information has been checked against HMRC guidance and other official sources at the date shown above, and is reviewed when the rules change. Tax legislation is complex and outcomes depend on your individual circumstances, so this article is provided for general information and does not constitute advice on which you should act. Any figures or worked examples are illustrative. Before making any decision, obtain advice specific to your situation from a qualified professional. Pro Tax Accountant accepts no liability for loss arising from reliance on this article alone.
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