R&D Tax Relief London Merged Scheme Guide for UK Businesses 2025/26

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A Shoreditch fintech founder phoned our Tooting office in March, about three weeks shy of her year end. She’d spent the better part of eighteen months building a fraud detection engine using machine learning models she couldn’t buy off the shelf. Her previous accountant had told her R&D tax relief was probably not worth claiming for a loss making startup.

We ran the numbers on the call. Qualifying expenditure landed at £312,000. Fourteen weeks later, £64,272 hit her account.

Her old accountant was wrong in 2023. Under the merged scheme that came in on 1 April 2024, the same advice would cost a client roughly double. I keep meeting London business owners working from a system that no longer exists, often because the accountant advising them hasn’t sat down properly with the new legislation. This guide is here to close that gap, and it’s written for the r&d tax relief london market specifically because the rules now reward firms who know the post 2024 regime cold. If you’d rather skip to a conversation, our R&D tax credit specialists handle claims end to end.

What changed in April 2024

HMRC ran two parallel R&D systems for twenty years. The SME scheme paid generous enhanced deductions and cash credits to smaller companies. The Research and Development Expenditure Credit, RDEC, paid a smaller above the line credit to larger companies and to SMEs whose claims were grant funded or subsidised. The boundary between the two confused almost everyone, including the people drafting the claims.

For accounting periods starting on or after 1 April 2024, both schemes collapse into one. HMRC calls it the merged R&D expenditure credit. Most people just say the merged scheme. The full statutory framework sits in HMRC’s CIRD89705 manual.

Why HMRC scrapped the old split

The merger wasn’t philosophical, it was forensic.

HMRC’s own 2022 estimates put error and fraud across the SME scheme at 24.4 percent. Billions in relief flowed to claims that should never have qualified. Consultancy mills selling no win, no fee claims to restaurants, retail chains, and one barber shop I personally read about in the trade press triggered a parliamentary scandal. The Treasury wanted the money back, and the system tightened.

The merged scheme standardises the credit rate, removes the cliff edge between SME and large company status, and puts every claimant through the same enhanced compliance gateway. The Additional Information Form, mandatory since August 2023, sits at the centre of every claim now, regardless of company size.

Who the new rules affect

Every UK company doing qualifying R&D for accounting periods starting 1 April 2024 onwards. London startups, established manufacturers, biotech firms, software houses, and the long tail of engineering consultancies across the South East all fall under one regime.

One exception lives inside the merged scheme. Loss making R&D intensive SMEs can elect into Enhanced R&D Intensive Support (ERIS), which keeps a more generous rate. There’s a full section on ERIS below.

If your accounting period straddles 1 April 2024, you’re operating under both regimes for that year. The pre April portion follows the old rules. The post April portion follows the merged scheme. Split period treatment catches out advisers who assume one rate applies across the whole year, and I’ve seen it cost clients five figures when picked up after the fact. Our corporation tax team handles split period reconciliations alongside the R&D claim itself.

How the merged R&D tax relief scheme works

R&D Tax Relief London Guide

The merged scheme is an above the line credit. That distinction does real work. The credit shows up as taxable income in your profit and loss account, which means it influences reported profit before tax. The credit itself attracts corporation tax, so the headline rate and the effective rate are different numbers. Worth slowing down on, because the maths is where most claims go sideways.

The 20 percent above the line credit

The merged scheme pays a 20 percent credit on qualifying R&D expenditure. A company spending £500,000 on qualifying R&D generates a gross credit of £100,000. That £100,000 enters the P&L as taxable income, picks up corporation tax at the main rate of 25 percent, and the net benefit lands at £75,000. For profit making companies on the main rate, the effective relief is 15 percent of qualifying expenditure.

Companies on the small profits rate of 19 percent see a slightly better effective rate, around 16.2 percent. Companies in the marginal relief band sit somewhere between.

Loss making companies and the 19 percent notional rate

Loss makers face the most interesting change. The notional tax rate applied to the credit dropped from 25 percent under the old RDEC to 19 percent under the merged scheme. For some claimants that’s a help. For others, it’s a sharp downgrade compared to the old SME scheme, which paid cash credits worth up to 33 percent of qualifying expenditure.

The merged scheme cash credit for loss makers works out at 16.2 percent of qualifying expenditure. A loss making SaaS firm in Canary Wharf with £400,000 in qualifying spend generates £64,800 in payable credit. Under the legacy SME scheme in 2022, the same spend produced £133,000. The drop is material, and we still see founders walk into the first meeting expecting the old number.

Worked example: a London SaaS firm claiming £180,000

A Hackney based SaaS company builds real time data synchronisation across distributed databases. Financial year ending 31 March 2025. Qualifying R&D expenditure: £900,000. Taxable profits before R&D adjustments: £1.2m.

Step one. £900,000 multiplied by 20 percent equals £180,000 gross credit.

Step two. Add the credit to taxable income. New taxable profit: £1.38m.

Step three. Corporation tax at 25 percent on £1.38m equals £345,000. Without the R&D claim, tax on £1.2m would have been £300,000.

Step four. The company pays £345,000 in tax instead of £300,000 but receives £180,000 from the credit mechanism. Net benefit: £135,000. Effective rate: 15 percent of qualifying expenditure.

Run the same calculation for a loss making company and the credit becomes a payable cash refund after the notional 19 percent deduction, capped by the PAYE and NIC cap of £20,000 plus three times the company’s relevant PAYE and NIC liabilities.

Enhanced R&D Intensive Support: the carve out for loss making SMEs

UK accountant advising a loss-making SME business owner about enhanced R&D tax relief support and innovation funding

ERIS exists because the merged scheme would have crushed genuine R&D intensive startups. The Treasury kept a separate track for loss making SMEs whose R&D spend dominates their cost base. The official gov.uk ERIS guidance sets out the qualifying conditions in full.

The 30 percent intensity threshold

To qualify for ERIS, a company must be an SME under EU recommendations (fewer than 500 staff, turnover under €100m or balance sheet under €86m), be loss making, and spend at least 30 percent of total expenditure on qualifying R&D. The threshold dropped from 40 percent in the original ERIS rules for accounting periods starting from 1 April 2024.

ERIS delivers a 186 percent enhanced deduction on qualifying R&D, generating a surrenderable loss. That loss converts to a cash credit at 14.5 percent. The combined effect is roughly 26.97 percent of qualifying expenditure returned as cash.

A biotech firm in White City burning £600,000 on qualifying R&D against £750,000 total spend gets £161,820 in cash through ERIS. The merged scheme would pay £97,200. That £64,620 gap is the difference between making payroll in November and not making it.

When ERIS beats the merged scheme

ERIS wins decisively for pre revenue biotech, deep tech hardware startups, and early stage AI companies where R&D dominates the cost base. The merged scheme catches up once a company crosses into profitability or dilutes R&D intensity through commercial scaling.

Election into ERIS happens through the CT600 and the Additional Information Form. The choice is made each accounting period, so a company can move between regimes as its profile shifts. Advisers who lock clients into one regime without an annual review leave money on the table, and we pick that up frequently when companies switch to us mid year. If you’re weighing the two, book a review with our R&D team before the year end.

What qualifies as R&D under HMRC guidelines

HMRC doesn’t care how innovative your work feels to you. It cares whether the work meets the statutory definition set out in the BEIS guidelines, now the DSIT guidelines after the 2023 machinery of government changes.

The DSIT definition test

Qualifying R&D requires a project seeking an advance in science or technology through the resolution of scientific or technological uncertainty. Three elements have to be present and provable.

First, an advance in the field, not just in your company’s knowledge. Reinventing what’s already publicly available won’t count.

Second, scientific or technological uncertainty. A competent professional in the relevant field couldn’t have readily resolved the problem using existing knowledge.

Third, a systematic, investigative, or experimental approach. Trial and error counts. Pure speculation does not.

HMRC’s CIRD manuals run to thousands of pages defining the boundary. The most cited reference,CIRD81300, sets out the core qualifying activity test. CIRD82000 onwards covers qualifying expenditure categories. If your accountant has never opened either, get a second opinion.

Qualifying expenditure categories

Six expenditure categories qualify under the merged scheme. Staff costs for personnel directly engaged in R&D, including salaries, employer NIC, and pension contributions. Externally provided workers, EPWs, supplied through agencies or staff providers. Subcontracted R&D, with new restrictions on overseas subcontracting from April 2024. Consumable items used or transformed during the R&D process. Software licences used in R&D activities. Data and cloud computing costs, added formally from April 2023.

The April 2024 changes restricted relief on overseas subcontracted R&D and overseas EPWs. Costs incurred outside the UK now qualify only where the work could not be replicated in the UK due to geographic, environmental, social, or regulatory factors. A London game studio outsourcing development to Vietnam to save costs won’t qualify under the new test. A marine biology firm running R&D in the Great Barrier Reef will.

Costs HMRC rejects

Routine software development. Cosmetic redesigns. Market research. Training. Recruitment. Rent. Rates. Telecoms beyond data and cloud. Capital expenditure outside R&D Allowances. HMRC enquiry teams reject claims weekly where companies bundled commercial product development with no underlying technological uncertainty.

The most common 2025 rejection pattern involves SaaS companies claiming on standard CRUD application development. Building a web app using mainstream frameworks isn’t R&D. Pushing the boundaries of distributed systems, machine learning model architecture, or novel data processing pipelines might be.

The claim process notification, AIF and CT600L

Three procedural gateways now sit between every claimant and the credit. Miss any one of them and the claim doesn’t get reduced, it gets invalidated.

Advance notification deadlines

Since 1 April 2023, first time claimants and companies that haven’t claimed in the previous three accounting periods have to submit a claim notification within six months of the end of the accounting period the claim relates to. The notification must be filed before any claim is submitted in the CT600.

Miss the deadline and the claim is invalid. There’s no discretion and no appeal. HMRC has already rejected hundreds of claims on this basis in the first eighteen months of the regime, and most of those clients had no idea the notification existed until the rejection letter arrived.

The Additional Information Form

Every R&D claim since 8 August 2023 has to be accompanied by an Additional Information Form submitted through HMRC’s online portal before the corporation tax return. The AIF asks for detail across several sections.

Company details and a named senior R&D contact. A description of each R&D project, including the field of science or technology, the advance sought, the uncertainties faced, and how those uncertainties were resolved. The AIF requires this for up to ten projects, or for the projects covering at least 50 percent of qualifying expenditure if more than three projects exist.

Qualifying expenditure breakdown by category. Details of the agent or accountant preparing the claim. Sign off from a named senior officer of the company.

The AIF isn’t a tick box exercise. HMRC actually reads them. Compliance teams use the project narratives as the primary basis for opening enquiries. Vague, templated, or AI generated descriptions trigger enquiries within weeks, and we now read every client’s previous AIF before agreeing to take on the next year’s claim.

Common reasons HMRC opens an enquiry

HMRC opened approximately 20 percent of R&D claims for enquiry in 2023/24, up from under 5 percent five years earlier. The patterns are repetitive.

Boilerplate project descriptions across multiple unrelated industries. Qualifying expenditure exceeding 80 percent of total staff costs without clear technical justification. Claims from companies in sectors with low historic R&D activity like hospitality, retail, and basic services. Repeated claims at consistent percentages of turnover that suggest formulaic preparation rather than genuine analysis. First time claimants prepared by agents with poor compliance records.

An enquiry adds twelve to eighteen months to the claim timeline and can result in penalties up to 100 percent of the relief claimed where HMRC finds careless or deliberate behaviour. If you’ve received an enquiry letter, speak to our tax advisory team before responding.

R&D tax relief sector examples in London

London’s R&D claim base concentrates in three sectors. Each carries its own qualifying patterns and its own compliance risks.

Fintech and SaaS claims

Open banking infrastructure, fraud detection models, regulatory technology, low latency trading systems, and novel data architecture all generate genuine R&D claims. The qualifying activity sits in the technical uncertainty layer: how to achieve sub millisecond response across distributed systems, how to train fraud models on imbalanced datasets, how to architect APIs that hold integrity under unpredictable load patterns.

The risk for fintech and SaaS founders is commercial product development dressed up as R&D. A slick UI doesn’t qualify. Integrating Stripe doesn’t qualify. Engineering a new payment routing algorithm that solves a documented technical problem does, and we’ve defended that exact line successfully in enquiry.

Manufacturing and engineering

London’s manufacturing base sits in West London, Park Royal, and along the Lea Valley corridor. Claims come from precision engineering, additive manufacturing, sustainable materials, and food technology. The qualifying activity often lives in process development rather than product development. Reducing tolerances below industry norms, developing new alloys, automating quality control through computer vision systems.

Life sciences and biotech

The Knowledge Quarter around King’s Cross, the White City Innovation District, and the wider golden triangle pull biotech R&D into London at scale. Drug discovery, diagnostic platform development, medical device engineering, and bioinformatics all generate claims. The qualifying activity is usually obvious. The compliance complexity hides in subcontractor relationships, especially where work involves overseas CROs or NHS partnerships.

Why London businesses choose IBISS & CO for R&D claims

We work out of Tooting, Wimbeldon and Barking, with a Dubai office for cross border clients. Our r&d tax credit specialists london team prepares claims for fintech firms in Shoreditch, manufacturers in Park Royal, SaaS companies across Soho and King’s Cross, and life sciences firms throughout the golden triangle.

Our process was built for the post 2024 regime, not retrofitted to it. Every claim runs through a technical interview led by a sector experienced adviser, never a templated questionnaire. Project narratives are drafted to clear the AIF compliance bar as the floor, not the ceiling. Qualifying expenditure calculations are reconciled against payroll, contractor ledgers, and cloud invoices, never estimated from headcount.

We carry full professional indemnity cover for R&D advisory work and operate under qualified supervision. Our enquiry defence record stands at zero penalty findings across every claim we’ve prepared under the AIF regime.

Book a discovery call at our Tooting office, or arrange a remote review for your next accounting period. If you’re in Wimbledon, Harrow, Kingston, or anywhere else across Greater London, we cover the lot. Looking for broader support beyond R&D? Our small business accountants team handles year round compliance, payroll, and corporation tax.

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R&D tax relief FAQs

What is the merged R&D scheme rate in 2025?

The merged R&D scheme pays a 20 percent above the line credit on qualifying expenditure. The effective benefit after corporation tax sits at roughly 15 percent for companies paying the main rate of 25 percent, and 16.2 percent for loss making companies under the 19 percent notional tax adjustment.

Yes. Loss making SMEs spending at least 30 percent of total expenditure on qualifying R&D can elect into Enhanced R&D Intensive Support, ERIS, which pays roughly 26.97 percent of qualifying expenditure as cash credit. Loss makers that fail the intensity test still receive a payable credit under the merged scheme at around 16.2 percent.

First time claimants and companies that haven’t claimed in the previous three accounting periods have to submit a claim notification within six months of the end of the accounting period. Miss the deadline and the claim becomes invalid with no right of appeal.

The AIF is a mandatory online submission required for every R&D claim since 8 August 2023. It captures company details, project narratives, qualifying expenditure breakdowns, and adviser identification. It must be submitted before the CT600 corporation tax return containing the claim.

Overseas subcontracted R&D and overseas externally provided workers qualify only where the work couldn’t reasonably have been undertaken in the UK because of geographic, environmental, social, or regulatory factors. Cost savings and skills availability don’t count as justification.

HMRC’s published service standard is twenty eight days for ninety five percent of claims. In practice, post April 2024 processing has slowed to twelve to sixteen weeks for most claims, with enquiry cases extending to eighteen months or longer.

Software development qualifies where it involves resolving genuine technological uncertainty. Routine application development using mainstream frameworks doesn’t qualify. Novel algorithm development, distributed systems engineering, machine learning model architecture, and core infrastructure work usually do.