Loss-making companies under the merged scheme: what happens to the credit?

What “loss making” means for the merged scheme

For accounting periods beginning on or after 1 April 2024, most companies claim under the merged R&D tax relief scheme. Some older content calls this “merged RDEC” because it is RDEC-shaped, but HMRC’s current guidance refers to it as the merged scheme, with ERIS as a separate route for some R&D-intensive loss making SMEs.  

Being loss making does not mean you automatically receive cash. Under the merged scheme, you calculate an expenditure credit on qualifying R&D spend, and it is treated as taxable income in your accounts or tax computation.  

If you have no Corporation Tax to pay for the current period because you are loss making, the credit does not disappear. Instead, HMRC’s payment mechanism determines whether the credit can become payable now, must be set against other liabilities, can be used in a group or must be carried forward.  

The merged scheme payment steps

HMRC applies an ordering process (the CT600L steps) to decide what happens to the credit. You will see this reflected in the CT600L guidance and the HMRC R&D manual.  

Step 1: set off against Corporation Tax for the current period

The first stop is always the current period Corporation Tax liability. If you are loss making, this is often nil, so the credit moves on to the next step.  

Step 2: a notional tax restriction is applied

A notional tax charge is applied in the mechanism. Under the reformed rules, HMRC notes that a lower rate of notional tax restriction is available to small profit makers and to loss makers, which affects the net amount that can flow through to later steps.  

Step 3: PAYE and NIC cap check

This is one of the biggest practical constraints for loss making companies expecting cash. If you have remaining credit after the earlier steps, the amount that can become payable can be restricted by the PAYE and NIC cap rules. Under the reformed reliefs, HMRC states the cap for both the merged scheme and ERIS is £20,000 plus 300% of the company’s relevant PAYE and NIC liabilities for payment periods in the accounting period.  

If the cap restricts you, the excess is not lost. It is carried forward under the mechanism to a later accounting period.  

Steps 4 to 6: set off against other liabilities before cash

If credit remains, HMRC’s process then requires it to be used against:

• Outstanding Corporation Tax liabilities from other accounting periods
• Group relief routes, where relevant and permitted
• Other HMRC liabilities

Only after these steps can any remaining amount potentially be paid out as a payable credit.  

Step 7: payable credit (if conditions are met)

If there is still credit left after the required set offs and restrictions, the remaining amount may become payable. Practically, this is the point where loss making companies can see a cash payment, but it is not guaranteed and it depends heavily on the earlier steps and cap position.

Why two loss making companies can get different outcomes

Two companies can have identical qualifying R&D spend and still see different results because the payable amount is influenced by:

• Whether there is any current period Corporation Tax to absorb first
• How the notional tax restriction applies
• Whether the PAYE and NIC cap restricts payment
• Whether there are older Corporation Tax liabilities or other HMRC liabilities that must be cleared first
• Whether there is a group position that changes set off routes

That is why it is safer to talk about “how the credit will be used” rather than assuming it will be paid as cash.

What you should prepare alongside the numbers

Loss making claims are not inherently higher risk, but they are often more sensitive because cash is involved. HMRC’s current claim process expects you to complete CT600L and confirm required submissions and good record keeping reduces delays and questions.  

At a minimum, be ready to show:

• A clean reconciliation from your R&D cost schedule to payroll and the ledger
• Clear staff time logic and project boundaries
• Contracts and scope for subcontractors and EPWs where relevant
• Consistency between your technical narrative and what you submit in the Additional Information Form (AIF)

Where ERIS fits for loss making companies

If you are an SME, loss making and meet the R&D intensity conditions, ERIS can change the value of support available compared to the merged scheme. The cost categories are aligned, but the credit calculation differs and you still need to consider process requirements and caps.  

If you think you might qualify, it is usually worth modelling both outcomes early rather than after filing.