R&D Tax Credits in 2026/27: The Merged Scheme, ERIS for Loss-Making SMEs and What HMRC Is Now Checking

UK SMEs and their accountants are working through the most significant overhaul of R&D tax credits in a decade. The 20% merged R&D Expenditure Credit (RDEC) replaces the old SME and large-company reliefs. The 30% ERIS intensity threshold now applies to loss-making SMEs. The 86% additional deduction and 14.5% cash credit offer significant benefits. A mandatory AIF and a 6-month pre-notification window now control claim eligibility. This article includes worked examples to clarify how these rules impact your business.

This guide is for UK SMEs running genuine R&D and their accountants. You are likely facing HMRC compliance checks, confusion over benefit calculations, and new reporting requirements. We explain how the merged R&D scheme affects your business and how to avoid the most common pitfalls.

What changed for accounting periods beginning on or after 1 April 2024

The merged R&D relief system replaced the old SME and large-company R&D schemes. All new claims must follow the merged R&D Expenditure Credit (RDEC) rules. Loss-making SMEs can now claim under the Enhanced R&D Intensive Support (ERIS) if they meet the 30% intensity threshold. New requirements include the Additional Information Form (AIF) and the 6-month pre-notification window. Companies must also comply with overseas expenditure rules and understand the PAYE/NIC cap on payable credits.

The old SME scheme vs the new merged regime: a side-by-side comparison

The old SME scheme applied to accounting periods beginning before 1 April 2024. It offered an 86% additional deduction on qualifying spend. Profit-making SMEs reduced their taxable profit accordingly. Loss-making SMEs could surrender their losses for a 18.6% payable credit, later reduced to 10%. The headline benefit was roughly 21.5p per £1 of spend for profit-makers. For loss-makers with high R&D intensity, the benefit could reach up to 27p. The old RDEC scheme applied to large companies and certain SMEs. It provided a 20% above-the-line taxable credit, using a mechanism now preserved as the merged scheme. The new merged regime from 1 April 2024 introduced a single 20% credit for almost all claimants. ERIS operates as a top-up route for loss-making R&D-intensive SMEs at the lower 30% threshold. A 12-month accounting period straddling 1 April 2024 must be split. The old scheme rules apply to expenditure incurred before the cut-off, and the new rules apply after. HMRC accepts a "just and reasonable" apportionment. The net effect for most SMEs is lower headline benefit than the old SME scheme, about 15p to 16.2p per £1 versus the old 21.5p. However, the new regime offers more predictable cash flow because the credit is above-the-line.

The merged R&D Expenditure Credit (RDEC): how it actually works

The merged R&D relief provides a 20% above-the-line credit on qualifying R&D expenditure. The credit goes through seven steps before becoming cash payable. The net benefit depends on your company's Corporation Tax rate.

Company Tax Rate	Net Benefit per £1 Spend
Small profits rate (19%)	16.2p
Main rate (25%)	15.0p

For example, a company at the main rate with £200,000 in qualifying R&D spend receives a £40,000 credit. After Corporation Tax, this results in £30,000 cash retained.

Enhanced R&D Intensive Support (ERIS): the 30% intensity test, the 86% deduction and the 14.5% cash credit

ERIS supports loss-making SMEs that are R&D-intensive. The intensity threshold is 30%. Qualifying spend receives 186% total deduction (100% original plus 86% additional). The resulting surrenderable loss can be exchanged for a 14.5% payable cash credit.

The maximum effective benefit is 26.97p per £1 of qualifying spend.

The Additional Information Form (AIF) and pre-notification: the two gates that now sink most claims

The AIF is mandatory for all claims submitted on or after 8 August 2023. It must be filed before the CT600. Missing the AIF removes the claim entirely.

Pre-notification is required for companies that have not claimed in the past three accounting periods. The deadline is 6 months after the end of the accounting period. Missing this deadline means losing the right to claim for that period.

Overseas expenditure, contracted-out R&D and the PAYE/NIC cap

For accounting periods beginning on or after 1 April 2024, externally provided workers and subcontracted R&D only qualify if:

• the worker is subject to UK PAYE, or
• the activity is carried out in the UK.

A narrow exception allows qualifying overseas expenditure if necessary conditions are not present in the UK. ERIS claimants from Northern Ireland may include some overseas expenditure under specific state-aid rules.

Under the merged scheme, the company that decided to undertake the R&D is entitled to the credit. Subcontractors cannot claim for the same activity.

The payable credit is capped at £20,000 + (3 × relevant PAYE and NIC liabilities). Companies that create or manage qualifying IP and have less than 15% of qualifying R&D with connected persons may be exempt.

The one-year buffer, connected-company aggregation and what counts as "total relevant expenditure"

A company that meets the 30% intensity test in a given accounting period can claim ERIS in the immediately following period even if its intensity drops below 30%, provided it remains loss-making. This prevents genuine R&D-intensive SMEs from cycling on and off the regime year-to-year. Connected-company aggregation applies intensity across the company and any connected companies under the CTA 2010 s1122 definition. A loss-making R&D-intensive SME with a related profitable sister company may fail the test if the sister's non-R&D spend pushes the group intensity below 30%. "Total relevant expenditure" means tax-deductible expenditure for the period plus the 86% additional ERIS deduction itself, minus certain excluded items. Capital expenditure that is not qualifying R&D capital, dividends paid, and expenditure already relieved under another scheme are excluded. A software-focused R&D-intensive SME with no non-R&D headcount and minimal overheads will sail through the 30% test. A hardware startup with large prototyping and bill-of-materials costs may need to carefully classify which costs are "relevant" and which are excluded. Company A spends £400k R&D, £100k other = 80% intensity, qualifies. Company B (its parent) spends £50k R&D, £450k other. Combined: £450k R&D out of £1m = 45%, still qualifies. If Company B's other spend were £1m instead, combined intensity drops to 32%, marginal pass.

Worked example 1: a profit-making SME spending £200,000 on qualifying R&D under the merged scheme

SoftCo Ltd spends £200,000 on qualifying R&D. The above-the-line credit is:

• 20% × £200,000 = £40,000 taxable

Assume SoftCo's taxable profit before R&D credit is £180,000. At the main rate of 25%, the net cash benefit is:

• £40,000 × (1 - 0.25) = £30,000 cash retained

If at the small profits rate of 19%, the benefit is:

• £40,000 × (1 - 0.19) = £32,400 (16.2p per £1 of R&D spent)

Worked example 2: a loss-making R&D-intensive SME spending £400,000

BioStartup Ltd spends £400,000 on qualifying R&D. The intensity is:

• £400,000 ÷ £700,000 = 57.1% > 30% threshold. Qualifies for ERIS.

The total deduction is:

• £400,000 + (86% × £400,000) = £744,000

The payable cash credit is:

• £744,000 × 14.5% = £107,880

Effective benefit:

• £107,880 ÷ £400,000 = 26.97% of qualifying spend

If the company paid £25,000 in PAYE/NIC, the cap is:

• £20,000 + (3 × £25,000) = £95,000

The payable credit is reduced to £95,000 unless the IP/connected-person exemption applies.

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What HMRC is actually rejecting in 2026: a field report from recent compliance checks

HMRC's R&D Anti-Abuse Unit (formed 2022, expanded 2024) has opened compliance checks on roughly 1 in 5 SME claims. AccountingWeb reports a sharp rise in rejection rates. Common rejection grounds in 2025-26 enquiries include "routine software development" claims where the advance in science or technology is not articulated, or where the work is configuration of existing platforms rather than novel work. The DSIT guidelines (formerly BIS) define R&D narrowly; HMRC is enforcing more strictly. "Unfounded technological uncertainty" claims, where the company asserts uncertainty but the AIF does not identify what a competent professional would already have known, are also rejected. AIF deficiencies include missing senior R&D officer details, missing project descriptions, agent contact missing, expenditure category headings inconsistent with the CT600 R&D entries. Connected-party subcontracting at non-arm's-length rates is also a common ground for rejection. Inadequate contemporaneous records are also problematic. HMRC now expects time-tracking against R&D projects, technical reports, and engineer time-recovery analyses. Penalties for incorrect claims can attract penalties of 0% (innocent error) to 30% (careless), 50% (deliberate) or 100% (deliberate and concealed) of the tax overclaimed. Senior Accounting Officer rules also apply for larger groups. Practical advice is to ensure every R&D claim has a written technical narrative authored by the engineer or scientist who did the work, not the accountant. Keep contemporaneous time-recording.

Three mistakes SMEs make on R&D claims today

Mistake 1: Missing the AIF deadline

Many SMEs submit their R&D claims without first completing the AIF. This removes the claim entirely. The AIF must be filed before the CT600.

Mistake 2: Incorrect overseas expenditure treatment

SMEs often include offshore R&D spend that does not meet the UK-based requirement. Only UK-based workers or UK-based activity qualify under the 2024 rules.

Mistake 3: Failing to pre-notify claims

Companies that have not claimed in the past three periods must notify HMRC within 6 months. Missing this window forfeits the right to claim.

Frequently asked questions: connected parties, grants, capital allowances and the AIF

Does receiving an Innovate UK grant block my R&D claim? No, but it changes the route. Grants are "notified state aid" and bring the project under the merged RDEC even for SMEs. The old SME route was disqualified by state aid. The new unified position applies the merged RDEC scheme to all claims involving notified state aid.

Can I claim R&D relief and capital allowances on the same equipment? R&D Allowances (RDAs) provide 100% first-year allowances on capital expenditure used for R&D. You cannot also claim AIA or main-pool allowances on the same item, but RDAs combined with the merged-RDEC revenue claim is the standard path for capex-heavy R&D.

What if my company straddles the 1 April 2024 cutover? Split the accounting period on a just-and-reasonable basis. Old SME or old RDEC rules apply to pre-1 April 2024 spend, new merged rules to spend on or after. File a single CT600 covering both halves with the AIF reflecting both.

Can I amend an old claim under the merged scheme? No. Amendments to claims for accounting periods beginning before 1 April 2024 use the rules in force at the time. Only new claims for post-cutover periods follow the merged scheme.

Do I need an AIF if I am amending a claim filed before 8 August 2023? Yes. The AIF requirement is triggered by the date of the claim or amendment, not the accounting period. Any R&D entry submitted on or after 8 August 2023 needs an AIF first.

Practical steps for the next twelve months

• Review your R&D activities to ensure they meet the new intensity and expenditure rules.
• Complete the AIF before filing your CT600 for any claim submitted on or after 8 August 2023.
• Verify pre-notification status to ensure you are eligible to claim.
• Check overseas spend for compliance with the new UK-based requirement.
• Confirm the PAYE/NIC cap applies to your company's credit calculation.
• Use a compliant R&D tax credits calculator to project benefits.
• Consider using an R&D compliance tool to track deadlines and reporting requirements.

How MBridge helps

MBridge provides tools and guidance to simplify R&D tax credit compliance. Our R&D tax credits calculator helps estimate benefits. Our blog post on HMRC changes offers further insights.

HMRC and legislation sources

• Research and development tax relief: the merged scheme and enhanced R&D intensive support
• Corporation tax: research and development relief
• Submit detailed information before you claim research and development tax relief
• Tell HMRC that you're planning to claim research and development tax relief
• Corporate intangibles research and development manual
• Corporate intangibles research and development manual
• Finance Act 2024 Schedule 1

This article is for informational purposes only and does not constitute professional advice. Consult a qualified accountant or tax advisor for your specific situation.