What has changed? A recap of the new regime

31 March 2025 marked the end of the first full year under the “new merged scheme” for R&D tax relief. Under these rules, the former SME and RDEC regimes combine into a single framework for most businesses, regardless of their size. In the merged scheme, a 20% credit is available, equivalent to approximately 15% net benefit after Corporation Tax.

The exception to this is for loss-making, R&D-intensive SMEs, which continue to qualify for the Enhanced R&D Intensive Support (ERIS) scheme, which was introduced from 1 April 2023. An “intensive” SME is one whose qualifying R&D spend represents at least 30% of total expenditure. ERIS claimants retain access to roughly 27% net benefit, supporting early-stage and research-driven ventures.

In both cases, overseas subcontractor and externally provided worker costs generally no longer qualify for relief unless strict exemptions apply, for instance, where the skills or facilities are not available in the UK.

On a more positive note, the new scheme enhances the ability to claim for contracted-out R&D. The more generous rules previously reserved for SMEs now apply to all, removing the earlier restriction that payments must be made to individuals or ‘qualifying bodies’. On this point, the recent HMRC’s guidance at CIRD84250 marks a shift from the previously harsh interpretation that any activities carried out to fulfil a contract are automatically considered contracted-out R&D. It makes clear that the terms of the contract are not the sole factor to be considered, which helps avoid situations where R&D clauses imply contracted-out work, but other factors indicate otherwise.

HMRC also confirms that there is no definitive test to determine whether R&D has been contracted out and which party or parties would ultimately have the right to claim. Instead, a set of weighted factors will be considered. The most significant of these is whether the R&D is incidental to the supply of a product or service under the contract. Other key considerations are the degree of autonomy in conducting the R&D, the level of financial risk assumed, and the retention of intellectual property, although less weight is placed on the retention of ‘know-how’.

Notifications: why timing matters

For accounting periods beginning on or after 1 April 2023, companies may be required to notify HMRC of their intent to claim R&D relief within six months of the end of their period of account. For a 31 December 2024 year-end, the deadline falls on 30 June 2025. Notification is required either when making a claim for the first time or if the last claim was submitted more than three years before the notification deadline. Claims made via amended returns may not satisfy this requirement.

Notification involves entering basic claim details through HMRC’s dedicated portal. This early step ensures HMRC records your claim before the full tax return is filed. Missing the deadline can lead to rejection of an otherwise compliant claim, as the relevant legislation does not give HMRC any discretion. Given the tight timeframe, specialist advice is invaluable to ensure notifications are accurate, timely and preserve full eligibility. Care should be taken when making a notification in that making an error on the form could invalidate a future claim. In particular, HMRC are reportedly rejecting claims if a notification is made for a specific accounting period and then the company’s year-end is subsequently changed, as the notification and claim periods do not match.

Navigating HMRC enquiries: success stories and enhanced support

HMRC enquiries are on the rise, particularly in complex areas such as software development. However, our experience shows that successful outcomes are achievable. In recent months, we have defended the full value of claims and in cases where clients chose to withdraw claims for commercial reasons, no penalty positions were successfully negotiated.

These results reflect the strength of our support and our proactive approach to managing risk. By working closely with our internal corporate tax and technical specialists, we help clients prepare robust, well-supported submissions. Our enhanced process builds on previous successes and aims to reduce the likelihood of future enquiries. Through our specialist R&D service line, we offer strategic guidance across every stage of the claim for clients in a wide range of sectors.

Still valuable: R&D tax relief as a catalyst for innovation

Despite lower headline rates and tighter eligibility rules, R&D tax relief remains a valuable incentive for driving innovation. The merged scheme’s ‘above-the-line credit’ is reflected in the company’s P&L, enhancing transparency and allows companies to present R&D activity as an operating benefit. That clarity is valuable during fundraising, audit reviews and sales processes. ERIS continues to offer cash credits to loss-making, R&D-intensive SMEs, supporting high-risk research phases.

Beyond the immediate cash benefit, the scheme offers strategic advantages. Qualifying projects can be highlighted in annual reports to reinforce a firm’s commitment to innovation. Internal planning can leverage estimated relief to allocate budgets more effectively. In competitive markets, demonstrating a strong R&D track record, backed by tax relief, can differentiate a business and support growth objectives.

We are well-positioned to help you

Navigating this new environment requires both technical knowledge and strategic insight. Our team brings a combination of experience, specialist expertise, and a client-focused mindset to help you adapt to the changes, protect your claims, and secure the best possible outcome.

Whether you are preparing a new claim, ensuring you meet the notification deadline, or responding to an HMRC enquiry, we are ready to assist. We understand the complexities of the regime and will work with you every step of the way to ensure you are well-positioned to succeed.

If you would like to discuss how these changes might affect your business or need support with your next steps, please get in touch. We are here to help you continue innovating with confidence and clarity.