Updated for accounting periods beginning on or after 1 April 2024.
One of the most common questions we are asked is:
“How much is our R&D tax claim actually worth?”
Unfortunately, there is no single answer.
Many advisers and marketing materials focus on headline percentages, but the amount a company ultimately receives depends on far more than simply multiplying qualifying expenditure by a fixed rate. The applicable relief, the company's tax position, existing liabilities and the PAYE cap can all affect the final outcome.
For accounting periods beginning on or after 1 April 2024 there are two principal forms of support:
- The merged Research and Development Expenditure Credit (RDEC) scheme, which applies to most companies.
- Enhanced R&D Intensive Support (ERIS), which is available to qualifying loss-making R&D intensive SMEs.
Understanding the difference between the two is essential because the most generous sounding regime does not always produce the highest benefit.
The Merged RDEC Regime
The merged RDEC scheme is now the default R&D tax relief regime for most businesses.
The credit is calculated at 20% of qualifying R&D expenditure and is taxable as trading income. Once the notional corporation tax deduction has been applied, the effective benefit is typically between 15% and 16.2% of qualifying expenditure.
This means that for every £100,000 of qualifying R&D spend, a company will often receive between £15,000 and £16,200 of value, either through a cash payment, a reduction in corporation tax or a combination of both.
Worked Examples
| Qualifying R&D Expenditure | Benefit at 19% | Benefit at 25% |
|---|---|---|
| £50,000 | £8,100 | £7,500 |
| £250,000 | £40,500 | £37,500 |
| £1,000,000 | £162,000 | £150,000 |
The difference arises because the legislation applies a notional tax deduction when calculating the amount available under the RDEC payment mechanism.
A common misconception is that profitable companies always receive 15% while loss-making companies receive 16.2%. In practice, the position is more nuanced than that and depends on the applicable corporation tax rate rather than simply whether the company is profitable.
Will the Company Receive Cash?
Not necessarily.
Many businesses calculate the value of their R&D claim and assume that amount will arrive in their bank account. In reality, the legislation requires the credit to pass through a series of statutory payment steps before any cash is released.
The credit may first be used against current corporation tax liabilities, then subjected to the notional tax deduction, tested against the PAYE cap and applied against other corporation tax liabilities. Where a company is part of a group, amounts may also be surrendered within the group. Finally, any remaining balance can be offset against other liabilities owed to HMRC, including VAT and PAYE.
Only after those steps have been completed will any balance be paid as cash.
As a result, the practical benefit of an R&D claim may be:
- a reduction in corporation tax,
- a reduction in other HMRC liabilities,
- a carried forward credit,
- a cash repayment,
- or a combination of all four.
Understanding ERIS
ERIS was introduced for qualifying loss-making R&D intensive SMEs and operates very differently from the merged RDEC regime.
The company receives an additional deduction equal to 86% of qualifying R&D expenditure and may then surrender losses in exchange for a payable credit calculated at 14.5%.
For example, assume:
- Qualifying R&D expenditure of £100,000.
- A trading loss before relief of £50,000.
The additional deduction increases the loss by £86,000, resulting in total losses of £136,000.
Applying the 14.5% payable credit rate produces a repayment of £19,720, representing an effective benefit of almost 20% of qualifying expenditure.
At first glance this appears significantly better than RDEC. However, the position is not always that straightforward.
Is ERIS Always Better Than RDEC?
No.
This is probably the biggest misconception surrounding the current R&D relief regime.
The ERIS credit is based on surrenderable losses, not simply qualifying expenditure. Where a company has a £1 loss before applying the additional deduction, the resulting credit can be surprisingly modest.
For example, a company with £100,000 of qualifying R&D expenditure and a £1 loss before additional relief would receive:
| Scheme | Benefit |
|---|---|
| RDEC | £16,200 |
| ERIS | £12,470 |
In this scenario the merged RDEC scheme produces the higher immediate benefit.
ERIS generally becomes more attractive as pre-relief losses increase. Using the same £100,000 of qualifying expenditure, ERIS broadly catches up with RDEC once pre-relief losses reach around £26,000. Above that level, ERIS will often generate the larger immediate benefit.
Existing Tax Liabilities Matter
Another point frequently overlooked is that a payable credit does not necessarily mean a cash payment.
Where a company owes money to HMRC, whether through corporation tax, VAT, PAYE or a Time to Pay arrangement, amounts payable under ERIS will normally be used to reduce those liabilities before any cash is released.
Businesses experiencing cashflow pressure should therefore be cautious when forecasting expected repayments. The amount calculated on paper may differ significantly from the amount ultimately received.
The PAYE Cap
Both RDEC and ERIS are affected by PAYE cap rules.
The cap is generally £20,000 plus 300% of relevant PAYE and NIC liabilities.
For some smaller companies this can have a significant impact on the timing of relief. While the underlying benefit is often preserved, restrictions may delay when that value can be realised.
Final Thoughts
The headline percentages quoted for R&D tax relief rarely tell the whole story.
Under the merged RDEC scheme, many companies will receive an effective benefit of around 15% to 16.2% of qualifying expenditure. ERIS can produce a higher return, but only where sufficient losses exist. In some circumstances RDEC may actually provide the better immediate outcome.
The amount ultimately received will also depend on PAYE cap restrictions, corporation tax liabilities and any other sums owed to HMRC.
This is why understanding the numbers behind a claim is just as important as identifying the qualifying R&D itself. A technically strong claim is only part of the picture. Businesses should also understand what the claim is likely to be worth in practice and how much of that value will actually arrive as cash.
If you would like an independent assessment of the likely value of your R&D tax relief claim, or would like a second opinion on advice you have already received, contact RandDTax for expert guidance.
Christopher Toms MA MAAT
Compliance Director
RandDTax
Contact us: https://randdtax.co.uk/contact/