This page describes the rules for accounting periods beginning before 1 April 2024. For accounting periods beginning on or after 1 April 2024, most companies claim under the merged scheme and loss-making R&D intensive SMEs can claim ERIS. See the merged scheme and ERIS pages for current rules.
Until the merged scheme, the UK ran two reliefs side by side: the SME scheme, an enhanced deduction with a payable credit for loss-makers, and the R&D expenditure credit, RDEC, for large companies and for SMEs whose work was subsidised or subcontracted to them. Claims for accounting periods beginning before 1 April 2024 are still being made, amended and checked within the 2-year window, so the old rules matter for years to come. This page summarises them, including the rate changes that took effect on 1 April 2023.
What it is
| Feature | SME scheme | RDEC |
|---|---|---|
| Who | SMEs: fewer than 500 staff and turnover of no more than €100 million or balance sheet of no more than €86 million, including linked and partner enterprises | Large companies, and SMEs for subsidised or subcontracted R&D |
| Benefit type | Enhanced deduction; payable credit for surrendered losses | Taxable expenditure credit, above the line |
| Rates, expenditure before 1 April 2023 | 130% additional deduction (230% in total); payable credit 14.5% of the surrendered loss | 13% of qualifying expenditure |
| Rates, expenditure from 1 April 2023 | 86% additional deduction (186% in total); payable credit 10%, or 14.5% for R&D intensive loss-makers with intensity of at least 40% | 20% of qualifying expenditure |
| Subsidised or grant-funded R&D | Excluded from the SME scheme; claimable under RDEC | Claimable |
| Subcontracted R&D | 65% of payments to unconnected subcontractors; an SME doing subcontracted work for a large company claimed RDEC | Large companies could claim subcontracted work only when subcontracted to individuals, partnerships or qualifying bodies |
| Cap on payable credit | £20,000 plus 300% of relevant PAYE and National Insurance, for periods beginning on or after 1 April 2021 | Capped at the PAYE and National Insurance of R&D staff |
| Overseas subcontracting | Allowed | Allowed where otherwise claimable |
Who it applies to
Any company with an accounting period beginning before 1 April 2024 that has not yet claimed, or whose claim is being amended or checked. A company with a year to 31 December claimed the year to 31 December 2024 under these rules; its first merged scheme period was the year to 31 December 2025. The 2-year claim window means claims for periods ending as late as 31 March 2025 could still be made in early 2027, and compliance checks on legacy claims will run beyond that.
The SME definition was the gateway. A company that failed any of the tests, or was linked to an enterprise that pushed the group over them, was a large company and claimed RDEC. The intensity test for the 14.5% credit from 1 April 2023 was the forerunner of ERIS, with a 40% threshold rather than 30%.
How it works
SME scheme. Deduct the additional percentage of qualifying expenditure in computing profits. A profitable company saved tax at its Corporation Tax rate on the extra deduction. A loss-making company could surrender the lower of its unrelieved loss and the enhanced expenditure for a payable credit at the applicable rate, subject to the cap and the going concern condition. The combination of the 2023 rate cuts and the rise in the main rate of Corporation Tax to 25% changed the arithmetic: the cash value for a loss-maker fell from 33.35% of qualifying expenditure (230% multiplied by 14.5%) to 18.6% (186% multiplied by 10%), while the value to a profitable company at the main rate rose slightly.
RDEC. The credit was 13%, then 20%, of qualifying expenditure, taxable, and applied through the same seven steps the merged scheme uses: against Corporation Tax, net of notional tax, within the cap, against other liabilities, by group surrender, and the balance paid.
Expenditure straddling 1 April 2023. The 2023 rate changes applied to expenditure incurred on or after 1 April 2023, not to accounting periods, so a period straddling that date was split by date of expenditure.
Worked example
Illustrative example. Fenland Optics, a hypothetical loss-making SME with a year to 30 June 2023 and qualifying expenditure of £400,000 spread evenly across the year.
| Expenditure | Additional deduction | Enhanced expenditure | Payable credit if surrendered |
|---|---|---|---|
| £300,000 to 31 March 2023 | 130%: £390,000 | £690,000 | 14.5%: £100,050 |
| £100,000 from 1 April 2023 | 86%: £86,000 | £186,000 | 10%: £18,600 |
| Total | £476,000 | £876,000 | £118,650, subject to the cap |
Had Fenland's R&D spending been at least 40% of its total expenditure, the credit on the post-April tranche would have been 14.5%, £26,970.
Common questions
Can we still claim for our 2023 accounting period? Yes, within 2 years of the end of the accounting period, with an additional information form and, where required, a claim notification.
Our grant-funded project was excluded from the SME scheme. Is that still true? For periods beginning before 1 April 2024, yes; it could be claimed under RDEC. Under the merged scheme the restriction has gone.
We were a subcontractor for a large company. Which scheme? RDEC, for that work, under the legacy rules.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.