For UK SaaS companies, R&D tax relief has been one of the most material tax incentives available, and it has also been one of the most reformed. The merged R&D scheme, which applies to accounting periods beginning on or after 1 April 2024, replaces the separate SME and RDEC regimes that operated before. There is now a single above-the-line credit for most companies, with a parallel Enhanced R&D Intensive Support (ERIS) regime for loss-making SMEs with high R&D intensity.
The merged scheme
Under the merged scheme, qualifying R&D expenditure attracts a 20% above-the-line expenditure credit (the merged scheme R&D expenditure credit, sometimes called RDEC by its old name). The credit is taxable, so the net benefit for a profitable company paying 25% corporation tax is approximately 15% of qualifying expenditure (20% credit, taxed at 25%, gives 15%). The HMRC published effective rate is approximately 16.2% for companies in the 25% main rate band on a gross basis, depending on the precise computation. Loss-making companies can receive a payable credit, subject to a PAYE/NIC cap.
Enhanced R&D Intensive Support (ERIS)
ERIS is a separate, more generous regime aimed at loss-making, R&D-intensive small and medium-sized enterprises. To qualify, an SME must:
- Be loss-making.
- Have R&D intensity (qualifying R&D expenditure divided by total relevant expenditure) of at least 30%. The threshold was originally 40% and was reduced to 30% for accounting periods beginning on or after 1 April 2024.
Qualifying ERIS claimants receive a 86% enhanced deduction on qualifying R&D expenditure, plus a 14.5% payable tax credit on the resulting surrenderable loss. The effective net benefit is in the region of 27p per pound of qualifying spend, which is materially better than the merged scheme rate for the right profile.
What counts as R&D for a SaaS company?
The technical definition of R&D for tax purposes comes from the DSIT guidelines (formerly BEIS), now applied by HMRC. The work must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. For SaaS companies, this typically means:
- Algorithm development where existing approaches cannot solve the problem and a competent professional in the field could not readily deduce the solution.
- Scalability and performance work that pushes beyond commercially available approaches.
- Novel integration challenges where data structures, APIs or distributed systems require uncertainty-resolving work.
- Machine learning model development involving meaningful research into model architectures, training approaches or domain-specific adaptations.
What does not qualify includes routine software development using established frameworks, building features using documented libraries and APIs, user interface improvements, business analysis and project management.
The technological uncertainty test
HMRC has tightened the application of the technological uncertainty test in recent years, especially for software claims. A claim must articulate the specific technical baseline (what was known before the project), the specific uncertainty that could not be resolved by a competent professional from available knowledge, the work undertaken to resolve it and the outcome. Generic descriptions ("we built a complex AI system") will not pass scrutiny.
Qualifying expenditure categories
- Staff costs of personnel directly engaged in qualifying R&D, apportioned where they split time across qualifying and non-qualifying work.
- Externally provided workers (EPWs), broadly contractors via an agency, subject to specific rules.
- Subcontracted R&D, subject to restrictions under the merged scheme that are tighter than the old SME regime.
- Software, data and cloud computing costs used in the R&D project, including AWS, GCP and Azure infrastructure where genuinely consumed in R&D.
- Consumables transformed or used up in the project.
The PAYE/NIC cap
To prevent abuse, the payable credit on loss surrenders is capped at three times the company's relevant PAYE and NIC liability, plus £20,000. For SaaS companies with small UK headcounts but substantial contractor or cloud spend, this cap can bite.
Compliance and HMRC scrutiny
R&D claims have been a major HMRC enforcement focus since 2022, with a substantial expansion of compliance resources and a marked increase in the rejection rate of speculative claims. From 1 August 2023 most claims require an additional information form to be submitted via HMRC's portal alongside the CT600, including project descriptions, costs categories and the senior R&D contact. Claims submitted without this form will be rejected.
Practical advice for SaaS founders
- Document R&D contemporaneously, project by project, with the technical baseline and uncertainty articulated.
- Track staff time by project and category from the start of the year.
- Engage with a competent professional who can sign off on the technical narrative.
- Be conservative. The cost of a rejected claim is the relief plus penalties.
How PushDigits supports R&D claims
We prepare R&D claims for UK SaaS and software businesses, including the technical narrative, costing analysis and additional information form. We work with you across the year to build the documentation that makes the claim robust. See our tax planning and business advisory pages, or book a consultation.