The merged R&D tax relief scheme has now been running for over a year, and from what I’ve seen speaking to founders and finance leads across the UK tech sector, a significant number are still operating as though the old SME and RDEC schemes are alive and well. They are not. HMRC R&D tax credit reforms have fundamentally changed how qualifying expenditure is calculated, how claims are submitted, and what level of documentation you need to survive an enquiry. Getting this wrong is expensive. HMRC collected over £300 million in R&D compliance activity in the 2023-24 tax year alone, and the scrutiny has not eased since.
What the merged scheme actually changed
From accounting periods beginning on or after 1 April 2024, most companies claim under a single merged scheme. The old SME R&D relief and the large company RDEC have been consolidated into one framework, with a standard above-the-line credit rate of 20%. SMEs that are R&D-intensive (spending at least 30% of total expenditure on qualifying R&D) retain access to an enhanced credit rate of 27%, which is a meaningful difference if you qualify.
The practical consequence that catches founders out is this: the merged scheme is an above-the-line credit, which means the benefit flows through your profit and loss account rather than arriving as a direct reduction in your tax bill. For loss-making startups used to receiving a payable credit under the old SME scheme, the mechanics feel different and the cash flow timing shifts. Your accountant should be modelling this properly, but many are not, particularly if they are generalists rather than R&D specialists.
There is also a retained separate scheme for qualifying R&D-intensive loss-making SMEs, often referred to as the ERIS (Enhanced R&D Intensive Support) scheme. If your qualifying R&D expenditure exceeds 30% of your total expenditure and you are loss-making, you can claim a payable credit of 14.5% of the enhanced expenditure. The threshold was reduced from 40% to 30% from 1 April 2024, which brought a larger population of companies into scope. If you have not checked whether your business now qualifies under ERIS, that is a straightforward piece of modelling worth doing this week.
The compliance pitfalls that are costing founders money
I’d argue the most common mistake is treating the R&D claim as an afterthought at year-end. HMRC’s compliance focus has shifted hard towards contemporaneous documentation. That means records created at the time the work was done, not a narrative written retrospectively by a claims consultancy six months after your financial year closes.
HMRC published updated guidance in 2024 making clear that project records, technical uncertainty logs, staff time allocation records, and subcontractor agreements all form part of the expected evidence base. If you are claiming staff costs, you need records showing how employees split their time between qualifying and non-qualifying activities. A rough estimate backed up by a spreadsheet prepared post-fact is not going to hold up if you receive an enquiry letter.
Subcontractor costs are another area of real confusion post-merger. Under the merged scheme, you can include 65% of payments to unconnected subcontractors carrying out qualifying R&D on your behalf, provided the work was contracted to you. However, if you are the subcontractor being paid to carry out R&D for a client, you can now claim under the merged scheme yourself, which was not permitted under the old SME rules. This is genuinely new territory for many tech service businesses and I have seen companies leave significant credits unclaimed because their advisers had not updated their understanding.
How to structure qualifying expenditure claims correctly
The categories of qualifying expenditure under the merged scheme are broadly: employee costs (including employer NI and pension contributions), subcontractor costs at the 65% rate, externally provided workers at 65%, software and consumables used directly in R&D, and payments to clinical trial volunteers. Cloud computing and data costs are now explicitly included, which matters enormously for software businesses running workloads on AWS, Azure, or Google Cloud. If you are renting compute to train models or run experiments, that expenditure can qualify.
The key structuring principle is to separate qualifying from non-qualifying activity at the project level, not the company level. A single employee can spend part of their time on qualifying R&D and part on routine development. You need a methodology for apportioning that time that you can defend. HMRC does not prescribe a specific method, but whatever you use needs to be consistent and documented.
For founders using personal AI assistants or third-party AI tooling within their R&D workflows, the question of whether software licence costs qualify depends on whether the software is directly used in the qualifying R&D activity. General productivity tools generally do not qualify. Tools used specifically to run R&D experiments or process qualifying data typically do. The line is not always obvious, and I’d recommend getting a written position from your adviser rather than making a judgement call informally. You can read more about how AI tools are changing the way knowledge workers approach technical work in our piece on how UK knowledge workers are using personal AI assistants to reclaim billable hours.
The additional information form and what HMRC actually wants to see
Since August 2023, all R&D claims must be accompanied by an Additional Information Form submitted online via HMRC’s portal before the CT600 is filed. This requirement has not changed post-merger and it catches a lot of companies off guard. The form asks for named contacts, a description of the R&D projects by category, the number of projects, and a breakdown of qualifying costs. Submitting the CT600 without the AIF means your claim will simply not be processed.
The project descriptions in the AIF are where many claims fall apart technically. HMRC’s guidance is explicit that you need to describe the scientific or technological uncertainty you were trying to resolve, not the business outcome you were aiming for. “We built a new feature for our SaaS product” is not a qualifying project description. “We sought to determine whether transformer-based text classification could achieve acceptable accuracy thresholds on sparse, domain-specific datasets without requiring prohibitive fine-tuning compute” is getting closer to what is expected.
HMRC has also stated publicly that it will continue to use compliance checks on high-value or high-risk claims. If your claim looks materially different from prior years without explanation, or if your qualifying expenditure seems disproportionate relative to your revenue or headcount, expect an enquiry. HMRC’s own figures show that R&D enquiries result in adjustments in the majority of cases they open, which tells you something about the quality of claims currently being submitted.
If your business also uses data from Companies House or HMRC datasets to benchmark performance against competitors, the discipline you apply there, treating government data sources seriously and documenting your methodology, is the same discipline you need to apply to your R&D claims. Our article on using Companies House and HMRC data to benchmark your business against UK competitors covers how to build that analytical rigour into routine decision-making.
Choosing the right adviser for post-reform claims
The R&D claims market has been shaken up considerably since HMRC began targeting the more aggressive consultancies operating on a pure contingency fee basis. I’ve watched several of those firms quietly wind down or pivot following compliance crackdowns. The guidance from the GOV.UK R&D relief pages is reasonably clear about what HMRC expects, but the interpretation still requires sector-specific expertise.
My take is that the best setup for a UK tech founder is a specialist R&D tax adviser working alongside your existing accountant, with a clear engagement letter that specifies who owns the technical narrative and who owns the financial claim preparation. The two disciplines are different. Conflating them is how you end up with a claim that looks financially tidy but collapses under technical scrutiny.
For founders thinking about how the R&D investment in your business connects to longer-term financial planning, the interaction between R&D tax credits and exit planning is worth understanding early. The way qualifying IP assets are structured inside your business affects both your R&D claim position and your eventual tax position on disposal. These decisions compound over time, so it is worth getting the architecture right now rather than unpicking it later.
The merged scheme is genuinely more accessible in some respects than what came before. But it rewards companies that treat their R&D documentation as an ongoing operational discipline, not an annual filing exercise. If you are still treating it as the latter, the reforms are not working in your favour.