Short answer
Two genuinely different mechanisms apply depending on which scheme you’re claiming under, and treating them as the same thing is the most common mistake on this point. Under the merged scheme, the expenditure credit itself—once discharged against your own tax first—can be formally surrendered to another group company, with a matching mechanism that ties the surrender to that company’s tax liability. Under the SME scheme and ERIS, there’s no equivalent surrender of the credit itself; instead, you choose how much of your qualifying loss to convert into a payable R&D tax credit, and whatever you don’t convert can instead be surrendered to a profitable group company under ordinary group relief, at full value, with none of the R&D-specific caps or mechanics applying to it at all.
Applies to
- Schemes
- Merged scheme · ERIS · Legacy SME
- Periods
- 1 April 2000 onwards
Two different mechanisms, not one
It’s easy to assume “group relief for R&D” is a single concept, but the two credit types are structurally different, and the group mechanics reflect that difference. The merged scheme’s credit is a taxable receipt with its own dedicated seven-step redemption process, one step of which is surrendering the credit itself. The SME/ERIS credit was never a taxable receipt in the first place — see How do I account for an R&D tax relief claim in my company’s accounts? — and what actually gets surrendered within a group for that scheme is the underlying trading loss, through the ordinary, long-established group relief rules that apply to any UK trading loss, R&D or not.
Merged scheme: surrendering the expenditure credit itself
Two different amounts can end up being surrendered to another group member, both arising from the same claim but at different points in the redemption process — see What does it mean for an R&D tax credit to be “above the line” or “below the line”? This fits into the full seven-step process.
- The ordinary excess at step 5 — whatever’s left of the credit after your own current-period tax liability, the notional tax deduction and the PAYE/NIC cap have all been applied.
- The notional tax deduction amount, which you can surrender to a group member instead of carrying it forward against your own future liability.
Both routes use the same matching mechanism once surrendered. The legislation works period by period: for each accounting period of the receiving group company that overlaps with your own surrender period, the overlap is calculated as a proportion, applied both to the amount of the receiving company’s corporation tax due for that period and to the surrendered amount itself, and the smaller resulting figure is used to discharge that period’s liability. This repeats across every overlapping period the receiving company has. If any of the surrendered amount is left over once every overlapping period has been worked through, it isn’t lost — it reverts to being treated as if it had never been surrendered, which means it falls back into your own redemption process or your own notional-tax carry-forward, rather than simply disappearing because the receiving company couldn’t use all of it.
Groups can also settle the surrender with an actual payment between the companies, and that payment is deliberately kept out of the tax computation on both sides — it isn’t treated as taxable income of the surrendering company or as a distribution, provided the payment doesn’t exceed the amount of credit actually surrendered. This mirrors how payments for ordinary group relief are treated, meaning a group can settle the economics of the arrangement in cash without creating an unintended tax consequence for either company, as long as the payment is documented as being for the surrendered credit and doesn’t exceed its value.
SME scheme and ERIS: choosing between the credit and ordinary group relief
This is where the mechanism genuinely diverges, and it’s a real planning decision, not a technicality.
You don’t have to convert your whole Chapter 2 surrenderable loss into a payable credit. The legislation is explicit that a claim can be made for a credit “in respect of all or part” of the loss — so a company can choose to claim a credit on only some of it, and leave the rest as an ordinary trading loss. What happens to the part you don’t claim a credit for depends on whether there’s a group company that can use it: it can be surrendered under the ordinary group relief rules to any group company with taxable profits to relieve, or, if there isn’t one, carried forward against the company’s own future trading profits.
Why you’d ever choose to leave value on the table as a credit rather than claim it in full is straightforward once you compare the numbers. The payable credit is worth a fixed percentage of the surrenderable loss, in cash, now — but it’s capped, and it’s the smaller of the two figures. Group relief has no equivalent cap and no scheme-specific restriction: a pound of loss surrendered to a profitable group company reduces that company’s taxable profits pound for pound, worth whatever the group company’s own marginal corporation tax rate is. Where a group has a genuinely profitable member paying tax at the main rate, surrendering the loss under ordinary group relief can be worth more to the group overall than the cash credit — and it sidesteps the PAYE/NIC cap entirely, since the cap only restricts the payable credit, not an ordinary loss surrender. See What is the PAYE and NIC cap on the R&D tax credit? for how the cap works and why a capped claim is exactly the situation where this comparison matters most.
The two routes aren’t mutually exclusive within the same claim. A company can claim a credit on the portion of its loss that fits comfortably within the PAYE/NIC cap, and surrender the rest under ordinary group relief instead of trying to force the whole loss through the capped, credit route.
What actually happens to the loss once part of it is claimed as a credit
A specific rule governs exactly how much of the loss is treated as “used up” once you’ve claimed a credit on part of it, and it matters for anyone tracking what’s still available to carry forward or group-relieve afterwards. Where you claim an R&D tax credit for an accounting period, your trading loss for that period — for the purposes of the ordinary rules on carrying a trading loss forward against future profits — is treated as reduced only by the amount of the Chapter 2 surrenderable loss you actually claimed a credit for, not by the whole surrenderable loss. In other words, claiming a credit on part of your loss doesn’t use up the rest of it: whatever wasn’t claimed for a credit remains fully available, either for group relief or to carry forward in the ordinary way.
What counts as a “group” for these purposes
The merged scheme’s surrender mechanism and the general group relief rules both work through the ordinary company-law concept of a group — broadly, chains of at least 75% ownership, the same underlying concept used for standard corporation tax group relief generally. This entry doesn’t restate the detailed group and ownership tests in full; where group structure itself is in doubt — overseas parents, minority shareholdings, complex chains — that’s worth checking against the general group relief rules directly rather than assuming them from the R&D-specific provisions, which don’t redefine what a group is for this purpose.
Worked example
Illustrative comparison for an SME-scheme company with a £100,000 Chapter 2 surrenderable loss, and a profitable group company able to use a surrendered loss. Figures are illustrative only — check reference/rate-timeline for current rates.
| Claim the full credit | Surrender the whole loss as group relief instead | |
|---|---|---|
| What happens | 14.5% credit claimed on the full £100,000 (illustrative rate), subject to the PAYE/NIC cap | £100,000 loss surrendered to the profitable group company under ordinary group relief |
| Value to the group | £14,500 cash, assuming no cap restriction | £100,000 relieved against the group company’s taxable profits — at, say, a 25% marginal rate, £25,000 less corporation tax paid by that company |
| Where the benefit lands | Cash to the claimant company | Reduced tax bill for the group company that used the loss — a real benefit to the group, but not cash received by the claimant directly |
| PAYE/NIC cap relevant? | Yes | No |
A group weighing this up in practice would also consider which company actually needs the cash, and whether an intra-group payment (protected from being a taxable distribution under the equivalent rule for ordinary group relief payments) can move the value to where it’s needed.
Where claims go wrong
- Assuming the SME/ERIS credit can be surrendered to a group company the same way the merged scheme’s credit can. It can’t. The credit itself has no group-surrender mechanism under Chapter 2 — only the underlying loss can be surrendered, and only through the ordinary group relief route, not an R&D-specific one.
- Automatically claiming the maximum credit without comparing it to what group relief would be worth. Where a profitable group member exists and the credit would be capped or restricted, defaulting to the credit without running the comparison can leave real value on the table for the group as a whole.
- Miscounting what’s left of the loss after a partial credit claim. Only the portion actually claimed for a credit is treated as used up — assuming the whole loss has gone (or, in the other direction, assuming none of it has) is a straightforward but consequential error when working out what’s still available to carry forward or group-relieve.
- Losing track of a merged-scheme group surrender that spans mismatched accounting period year-ends. The matching mechanism works overlap by overlap across the receiving company’s accounting periods — a surrender that isn’t fully absorbed reverts rather than being lost, but only if that’s actually tracked, not assumed.
John Mapother
Founder & Director
Last reviewed 9 September 2026