The Merged R&D Scheme: What Changed and What It Means for Your Startup

If you last looked at R&D tax credits a couple of years ago, the rules you remember have largely gone. For accounting periods beginning on or after 1 April 2024 the separate SME scheme and the Research and Development Expenditure Credit have been folded into a single merged scheme, with a parallel route for the most research-heavy small companies. The headline rates are lower than the old SME enhancement, the mechanics work differently, and there is a notification step that catches out first-time claimants. For a startup where the annual credit is often the largest single cash inflow, getting the new rules right matters.

One scheme instead of two

Before April 2024 the relief you could claim depended on whether you counted as a small or medium-sized enterprise or a large company, and the two regimes paid out very differently. The merged scheme removes that split for most companies. Qualifying expenditure now generates a single expenditure credit at a rate of 20%, which HMRC sets out in its guidance on the merged scheme and enhanced R&D intensive support. That credit is itself taxable, so the net benefit after Corporation Tax is lower than the 20% headline suggests, typically around 15p in the pound for a profitable company and closer to 16.2p where the small profits rate applies.

The credit is described as above the line because it is recognised in your accounts as income rather than as a reduction in the tax charge. For a startup that is still loss-making, the credit can be surrendered for a cash payment from HMRC rather than carried forward, which is what makes the relief so useful before there are any profits to shelter.

The enhanced route for R&D-intensive SMEs

Alongside the merged scheme sits Enhanced R&D Intensive Support, known as ERIS, aimed at loss-making small companies that spend most of their money on research. It works the way the old SME scheme did. A qualifying company takes an extra 86% deduction on top of the normal 100%, a total deduction of 186%, and can then surrender the resulting loss for a payable tax credit worth up to 14.5% of the surrendered amount. For a heavily research-focused loss-making startup that combination is worth roughly 27p of cash for every qualifying pound, well above what the standard merged-scheme credit delivers.

The gateway to ERIS is the intensity test. Your relevant R&D expenditure, including that of any connected companies, has to be at least 30% of your total relevant expenditure for the period. Many genuine technology startups clear this comfortably in their early years, when almost all spending is engineering payroll and cloud compute and there is little else on the profit and loss account. As commercial costs such as sales and marketing grow, the ratio falls, and a company that qualifies one year may not the next. The threshold is worth modelling deliberately rather than discovering after the year end, and it runs throughout the wider R&D tax credits handbook for tech and software startups.

What still counts as qualifying R&D

The merger changed the rates and the mechanics, but not the underlying definition of research and development. You still need a project that seeks an advance in science or technology and that runs into scientific or technological uncertainty a competent professional in the field could not readily resolve. For software startups that usually means novel architecture, performance engineering at the edge of what existing tools allow, or building something where the established approach simply does not exist yet. Configuring an off-the-shelf framework, assembling standard features, or following documented best practice does not qualify, however much effort it took.

The qualifying cost categories are broadly familiar: a proportion of staff time spent on the qualifying work, externally provided workers, subcontractors, consumable items, software licences, and cloud computing used in the R&D itself. One real change under the merged scheme is a tighter stance on where that work happens. Subcontracted and externally provided worker costs now generally need the underlying activity to take place in the UK, with narrow exceptions, so startups that lean on overseas development teams should check how much of their spend still qualifies before they bank on a number.

The notification step that voids claims

The change most likely to cost a startup its entire claim has nothing to do with rates. Many companies now have to tell HMRC in advance that they intend to claim, using a separate claim notification form. The deadline is six months after the end of the period of account, and HMRC sets out exactly who is caught in its guidance on telling HMRC that you plan to claim. First-time claimants are within scope, as is any company whose most recent claim was made more than three years before the end of the notification window.

Miss that deadline and the claim is invalid no matter how strong the underlying R&D is. This is a genuine trap for early-stage companies, because the notification window opens and closes well before you would normally sit down to prepare the claim itself alongside your annual accounts. Put the notification date in the calendar the moment you start a qualifying project, not when you start thinking about the Corporation Tax return.

How the credit lands in your cash flow

For a loss-making startup the R&D credit is a cash event, not just a tax saving, and it deserves a line of its own in your forecast rather than being buried in a tax assumption. HMRC aims to process routine repayment claims within around 28 days of submission, but claims selected for compliance checks can take several months, and enquiry rates have risen sharply since 2022. Building the receipt into your model as a probability-weighted inflow with a realistic delay is part of sensible cash flow management, and the timing of that payment often shapes when a startup needs to be back in the market for its next round of funding.

The practical discipline is to document as you go. The companies that survive an HMRC compliance check with the least pain are the ones that recorded the technological uncertainty, the approach taken, and the cost split while the work was happening, rather than reconstructing a narrative months later. Contemporaneous records are worth far more than a polished write-up assembled after the fact, both for getting the claim agreed and for getting the cash paid quickly.

Common questions

Is my startup better off under the merged scheme or ERIS?

If you are loss-making and your qualifying R&D is at least 30% of total spending, ERIS is materially more generous, worth roughly 27p in the pound against around 15p net under the merged scheme. If you fall below the 30% intensity threshold, or you are profitable, the merged-scheme expenditure credit is the route. The two are not a free choice: which one applies turns on your loss position and your intensity ratio for the specific accounting period.

Did the headline rate really fall for early-stage tech startups?

For many companies, yes. The old SME scheme was more generous in cash terms than the standard 20% merged-scheme credit. The enhanced ERIS route preserves a higher rate, but only for loss-making companies that meet the 30% intensity test. Plenty of startups that comfortably claimed under the old SME scheme now receive less unless they qualify as R&D-intensive.

When exactly does the merged scheme apply to my company?

It applies to accounting periods beginning on or after 1 April 2024. A company with a March year end moved across cleanly; a company with a different year end may have a final period under the old rules before the new scheme takes over. Check the start date of the period you are claiming for rather than assuming the calendar year, because the answer depends on your own accounting period.