Changes to R&D Tax Relief in 2025: Read This Before Claiming

Lewis Songaila

Read • 6 min

The R&D Tax Relief scheme has undergone enormous change, with major consequences for your 2025 claim.

As part of the Praetura portfolio, you’ve probably heard of R&D Tax Relief, the UK incentive that lets innovative businesses recoup up to 27% of their development-related investments.

However, you might not realise that the scheme has undergone a tremendous amount of change over the last few years, with many recent reforms impacting companies for the first time this year.

If you’re planning to claim R&D Tax Relief in 2025, here’s what you need to know.

A summary of the changes🔗

The government has merged the SME and RDEC schemes into the merged scheme, which most companies have to claim under
However, you may be able to claim under the more generous ERIS scheme
The rules around claiming relief on subcontracted R&D have been completely overhauled
Most payments to overseas subcontractors and externally provided workers no longer qualify for relief

You’ll likely have to claim under the new merged scheme🔗

If you’re planning to claim R&D Tax Relief, you will probably need to file under the new merged scheme, which replaces the old SME and R&D expenditure credit (RDEC) schemes.[1]

The merged scheme is based on RDEC, providing funding as an above-the-line credit worth up to 16.2p per £1 of qualifying investment.

If you’ve claimed under RDEC before, the filing process and seven-step credit calculation will look pretty familiar. If you only ever claimed under the SME scheme - as would be the case for most startups and scaleups - you’ll have to learn a whole new set of procedures and calculations.

Like the other changes in this guide, the merged scheme applies to accounting periods starting on or after 1 April 2024. This means it’ll affect claims filed in and after April 2025.

Learn more about the merged scheme.

The ERIS scheme is now more accessible🔗

If you’re unprofitable and investing heavily in R&D, you may now be eligible for enhanced R&D intensive support (ERIS), a more generous scheme with a relief rate of 27%, two-thirds higher than the merged scheme.

To qualify for ERIS, your company needs to be:

A small or medium-sized enterprise - full definition here
Unprofitable in the period you’re claiming for
R&D intensive

R&D intensiveness refers to how much you invested in qualifying development costs compared to your overall spending in the claim period.

The threshold for R&D intensiveness is 40% for accounting periods starting before 1 April 2024. So, to qualify as R&D intensive, your company would need to have spent 40% or more of its total expenditure during the relevant claim period on qualifying costs.

In a welcome boost for startups and scaleups, the government has lowered the threshold for R&D intensiveness from 40% to 30%. Affecting accounting periods starting on or after 1 April 2024, this change will allow 5,000 more businesses to claim under the ERIS scheme.

To work out whether you’re R&D intensive, you need to make sure you’ve identified every penny of expenditure that qualifies for R&D tax relief. That includes spending on qualifying indirect activities, which can be hard to separate from non-qualifying work.

New rules for claiming relief on subcontracted R&D🔗

The rules around claiming relief on R&D contracted to another business have been completely overhauled.

Who has the right to claim (the customer or contractor) is now decided by three tests:

There must be a contract between the customer and the contractor
The contractor must undertake work that qualifies for R&D Tax Relief
The customer ‘intended or contemplated’ the need for R&D

As a result, in most cases, it’s the customer who will be able to claim relief, not the contractor.

What does ‘intended or contemplated’ mean?🔗

The third test introduces the idea of ‘intending or contemplating’ the need for R&D.

The wording is pretty vague, but essentially, this test asks whether, in theory, a qualified technical expert (a competent professional, to use the scheme’s terminology) could have predicted that the contractor would need to undertake qualifying R&D before the work commenced.

To reiterate, the test is a theoretical one. However, if you are the customer, it’s still best practice to include evidence that intention or contemplation took place.

When the contractor can claim instead🔗

The contractor will be able to claim instead of the customer if these three conditions are satisfied:

The contractor was hired to perform R&D
The customer is ineligible for R&D Tax Relief, e.g. because they’re not liable for corporation tax
The contractor incurred qualifying expenditure

This change will have a big impact on companies that regularly use contractors or perform R&D for other companies. It will also affect companies involved in complex R&D supply chains, especially those that include overseas businesses.

Fresh restrictions on relief for overseas subcontractors and EPWs🔗

Most payments to overseas subcontractors and externally provided workers (EPWs) no longer qualify for R&D Tax Relief.[3]

This is a bitter blow for UK startups and scaleups, many of which use overseas workers to access technical talent while keeping costs down. Here’s how this change is applied:

Subcontractors – If the R&D took place outside the UK, you won’t be able to claim relief on the overseas subcontractors that delivered the work

EPWs – You can only claim relief on EPWs that are liable for PAYE and NIC

However, importantly, if the conditions you need to perform R&D don’t exist in the UK, and it would be unreasonable for you to recreate them, you can claim relief on overseas contractors and EPWs.

The qualifying conditions can be physical–geographical, environmental, or social –or regulatory.

A good example would be if you were building a new piece of equipment for measuring tornadoes. There are, thankfully, very few tornadoes in the UK, and creating more of them would be, to say the least, frowned upon.

So, you would need to test and refine your equipment in a country more prone to them. Contractor and EPW costs associated with that work would probably qualify for relief.

What’s next for my claim?🔗

Clearly, the R&D Tax Relief scheme has undergone some significant changes; some positive, others less so. If you’re planning to claim in 2025, you need to make sure you’re across these changes and know how to reflect them in your upcoming claims.

Not to sound too doomful, but with HMRC clamping down on non-compliance, companies have little room for manoeuvre. One false step could trigger a months-long, time-consuming enquiry, delaying your funding and potentially damaging your reputation with the tax authority.

Still, there is light at the end of the tunnel. The new government has pledged not to make further changes to the scheme during the current parliament. If all goes well, we shouldn’t see further reforms for another four years, giving businesses time to catch their breath.