HMRC’s R&D Tax Relief Reforms: What UK Businesses Need to Know in 2025

The reforms that came into effect from April 2024 represent the most significant changes to the UK’s R&D tax relief system in more than twenty years. Two long-standing schemes were replaced by a single merged framework, rates were restructured, new administrative requirements became mandatory, and the treatment of overseas costs changed materially. For any UK company that claims — or is planning to claim — R&D tax relief, understanding these changes is essential. Getting them wrong could mean a rejected claim, an HMRC enquiry, or simply leaving money on the table.

This article provides a clear, up-to-date overview of everything that has changed and what it means for your next claim.

The Old System: Before April 2024

Prior to April 2024, the UK operated two separate R&D relief schemes that applied to different types of company:

• The SME scheme — available to companies with fewer than 500 employees and either turnover below €100m or a balance sheet below €86m. It offered an enhanced deduction of up to 230% on qualifying expenditure (reduced from 269% in April 2023), meaning a company could deduct £2.30 from taxable profits for every £1 spent on R&D. Loss-making SMEs could surrender the enhanced loss for a cash payable credit. At its peak, this was a highly generous scheme that made the UK particularly attractive for early-stage R&D-intensive businesses.
• The RDEC scheme (Research and Development Expenditure Credit) — available to large companies and SMEs that could not use the SME scheme (e.g. because their R&D was subsidised or contracted from a large company). RDEC offered a 13% above-the-line credit on qualifying expenditure, rising to 20% in April 2023. Being “above the line” meant the credit appeared in the income statement rather than below the line, which made it more visible in financial reporting.

The two-scheme system created significant complexity. Companies had to determine which scheme applied, navigate different rules on eligible costs and subcontractors, and manage different reporting treatments. Errors in scheme classification were common and sometimes costly.

The New Merged Scheme

For accounting periods beginning on or after 1 April 2024, the SME and RDEC schemes have been replaced by a single merged scheme. The merged scheme applies to all companies — regardless of size — unless they qualify for the separate Enhanced R&D Intensive Support (ERIS) scheme (see below).

The key features of the merged scheme are:

• A 20% above-the-line RDEC-style credit on all qualifying expenditure
• The credit is recognised in the income statement (“above the line”), making it visible to investors and lenders
• After the standard 25% corporation tax rate, the net benefit is approximately £15 per £100 of qualifying spend for a profit-making company
• For loss-making companies, the credit can be used to offset PAYE/NIC liabilities or, subject to the PAYE cap rules, received as a cash payment
• The qualifying expenditure categories are broadly similar to the old RDEC rules, with updated provisions for cloud computing and data costs

The merged scheme is simpler than its predecessor but less generous for SMEs that were previously claiming under the old SME scheme. A profitable SME that previously benefited from a 230% enhanced deduction (effectively ~28.5p per £1 at a 19% tax rate) now receives approximately 15p net per £1. This is a real reduction in value, and companies should update their financial models to reflect the new rates.

Enhanced R&D Intensive Support (ERIS)

Recognising that the merged scheme represented a significant cut for the most R&D-intensive startups, the government introduced a separate “safety net” for a specific group of companies. The Enhanced R&D Intensive Support (ERIS) scheme applies to SMEs that are loss-making and spend at least 30% of their total expenditure on qualifying R&D.

Under ERIS, qualifying companies receive a 27% credit — broadly equivalent in value to the old SME scheme’s headline payable credit for loss-makers. In practice, this equates to approximately £27 of net cash benefit per £100 of qualifying spend, paid directly by HMRC regardless of tax position.

If your business is pre-revenue or structurally loss-making, and you are spending a substantial proportion of your budget on R&D, it is worth modelling your ERIS eligibility carefully. The 30% threshold applies to total expenditure — not just R&D expenditure — so the ratio calculation must be done accurately. Missing the threshold by a small margin means falling back to the merged scheme at 20%.

The Additional Information Form (AIF)

One of the most operationally significant changes to the R&D claims process came into effect on 8 August 2023: the mandatory Additional Information Form (AIF). This is a separate online form that must be submitted to HMRC before, or at the same time as, the corporation tax return that includes the R&D claim.

The AIF captures:

• Contact details for the senior officer responsible for the R&D claim
• Details of any agent or adviser who helped prepare the claim
• A breakdown of qualifying expenditure by category (staff, subcontractors, software, consumables, cloud, etc.)
• Descriptions of qualifying R&D projects, including the advance sought and the uncertainties addressed

If the AIF is not submitted before the corporation tax return, HMRC will reject the claim automatically. There is no grace period. This requirement has caught out a number of companies — particularly those relying on accountants who were not aware of the change. If you are preparing a claim for any period beginning after 1 April 2023, the AIF is mandatory and non-negotiable.

Overseas Costs: A Major Restriction

From April 2024, the treatment of overseas subcontractor and externally provided worker costs changed significantly. Under the old SME scheme, UK companies could include the costs of overseas contractors in their R&D claims without restriction, provided the work was qualifying R&D. Under the merged scheme, this is no longer the case.

Overseas subcontractor and EPW costs now only qualify if there is a specific, documentable reason why the work could only be performed outside the UK — for example, access to specialist geographical conditions (environmental testing, geological surveys), regulatory requirements in another jurisdiction, or specific infrastructure that does not exist in the UK. Commercial convenience or cost savings are not accepted reasons.

For companies that routinely use overseas development contractors — particularly those working with nearshore or offshore software teams — this is a material change. Costs that were previously claimable may no longer qualify, and claims should be reviewed to ensure they do not include overseas expenditure that fails the new test.

What This Means for Your Claim

Taken together, the reforms create a landscape that is simpler in structure but higher in compliance requirements. The merged scheme removes the need to determine which scheme applies (for most companies). But the AIF requirement, the overseas cost restrictions, and the increased scrutiny environment all mean that documentation quality matters more than ever.

A claim prepared with careful attention to project descriptions, a clear mapping of costs to qualifying activities, and a well-evidenced AIF submission will be processed smoothly. A claim that was borderline-adequate under the old regime may now trigger an enquiry. The standard has moved, and businesses (and their advisers) need to move with it.

Navigating these requirements is not something your finance team should be figuring out alone. Menlo keeps your claims compliant with the current rules as a matter of course — building AIF-ready project descriptions and expenditure breakdowns automatically from your source data, so your claim meets HMRC’s requirements from the ground up.

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