The Merged R&D Scheme & ERIS: Rates, Eligibility & HMRC Compliance

The old SME and RDEC schemes are gone for accounting periods starting on or after 1 April 2024. Every R&D claim now runs through one of two regimes, and getting the classification wrong is now as much a compliance risk as the underlying claim itself.

Why the Schemes Were Merged

The previous two-scheme structure, a separate SME scheme and RDEC for large companies, had become a significant source of error and abuse, with a persistent stream of claims incorrectly submitted under the more generous SME scheme by companies that did not actually qualify, whether because of size, subsidised expenditure, or subcontracted R&D arrangements with connected parties. The merged scheme is intended to simplify the rules by applying a single set of rules and a single credit mechanism to the great majority of claimants, leaving only a distinct, more targeted regime for the loss-making, R&D-intensive SMEs the government wanted to continue supporting more generously.

The Merged R&D Expenditure Credit Scheme

The merged scheme applies an above-the-line expenditure credit at a headline rate of 20% of qualifying R&D expenditure. Because the credit is itself taxable as trading income, the real-world net benefit to the claimant, after corporation tax is applied to the credit, is typically in the region of 15% to 16.2%, depending on the company's applicable corporation tax rate. The scheme applies to all companies with qualifying R&D expenditure that do not meet the separate ERIS eligibility criteria, which in practice means most large companies, all profitable SMEs, and loss-making SMEs that fall short of the 30% R&D intensity threshold.

Enhanced R&D Intensive Support

Enhanced R&D Intensive Support exists alongside the merged scheme as a distinct, more generous regime specifically for loss-making SMEs that are heavily R&D focused. Rather than the above-the-line credit mechanism used by the merged scheme, ERIS broadly follows the additional deduction and payable credit structure familiar from the old SME scheme, and can deliver an effective credit rate of up to 27% for qualifying claimants, a materially better outcome than the merged scheme's net benefit, reflecting the government's continued policy support for early-stage, R&D-heavy businesses that are not yet profitable.

The 30% Intensity Threshold

Eligibility for ERIS turns on two conditions applied together: the company must be loss-making for tax purposes in the relevant period, and its qualifying R&D expenditure must represent 30% or more of its total relevant expenditure for that period, the R&D intensity test. A company that meets the intensity threshold in one period but not the next moves between the two regimes accordingly, and the legislation includes a one-year grace period allowing a company that previously qualified as R&D intensive to retain ERIS treatment for one further period even if it temporarily falls below the 30% threshold, provided it met the condition in the immediately preceding period, recognising that R&D spending intensity can fluctuate year to year for genuine commercial reasons.

The PAYE and NIC Cap

Both the merged scheme and ERIS retain a PAYE and National Insurance contributions cap on the amount of payable credit a claimant can receive, carried over in substance from the old SME scheme's anti-abuse rules, intended to prevent claims being inflated well beyond the company's actual UK employment cost base. Companies with a modest UK payroll relative to the scale of their claimed R&D expenditure, a pattern HMRC associates with certain higher-risk claim profiles, should model the cap's effect on the claim carefully rather than assuming the headline rate will be received in full.

Where HMRC Compliance Risk Sits

HMRC's compliance focus on R&D claims has intensified substantially in recent years and shows no sign of easing under the merged regime. The areas of greatest current risk carry across from the old schemes and remain squarely relevant: whether the work actually meets the competent professional test for a genuine advance in science or technology, rather than routine technical problem-solving; whether subcontracted R&D and connected-party arrangements have been correctly characterised, since misclassification here can affect both the rate and, under ERIS specifically, whether the intensity threshold is genuinely met once subcontracted costs are properly allocated; and whether contemporaneous evidence exists to support the claimed uncertainty and the competent professional's assessment of it, rather than evidence assembled after the event specifically to support an enquiry response.

Practitioner Application

• Confirm which regime applies before preparing the claim, since the merged scheme and ERIS use different claim mechanics, not just different rates, and misclassifying a claim risks both an incorrect calculation and increased HMRC scrutiny.
• Test the 30% intensity threshold carefully where a company is close to the boundary, including how subcontracted and connected-party expenditure is allocated between qualifying R&D spend and total expenditure for the purposes of the calculation.
• Model the PAYE and NIC cap explicitly for any claimant with a UK payroll that is small relative to the scale of the R&D expenditure claimed, rather than assuming the headline credit rate will be paid in full.
• Build and retain contemporaneous technical evidence of the competent professional's assessment of the underlying scientific or technological uncertainty at the time the work was carried out, since this remains the single most common point of HMRC challenge regardless of which scheme applies.

Frequently Asked Questions