Understanding the Merged R&D Tax Relief Scheme
Introduction
For accounting periods beginning on or after 1 April 2024, the UK’s R&D tax relief landscape changes materially. The formerly separate SME and RDEC regimes will be merged into a singlular scheme, largely modelled on the previous RDEC scheme. This reform aims to simplify the rules, improve consistency, and strengthen compliance controls. But for businesses, it also introduces new strategic risks and operational changes that must be understood in depth.
This article provides a comprehensive guide to the Merged Scheme: its structure, core principles, new rules (especially around subcontracting and overseas work), transitional issues, and practical steps for adapting claims strategy.
Why the Change? Policy Objectives
Simplicity and consistency: The reform seeks to simplify administration by removing the structural overlap and interpretive inconsistencies between the SME and RDEC schemes.
Stronger compliance framework: A unified approach allows for closer alignment of HMRC review standards, data-driven risk modelling, and standardised documentation expectations.
Greater transparency in financial reporting: The “above-the-line” credit format ensures the benefit of R&D is more clearly visible in company accounts to stakeholders to highlight the financial incentive and value of the innovative work previously undertaken.
Incentivising UK-based R&D: More restrictive rules on overseas expenditure reflect policy focus on retaining innovation activity in the UK.
Core Structure & Key Features
Expenditure Credit & Rate
Under the Merged Scheme, qualifying R&D expenditure yields an expenditure credit at a 20 % gross rate.
That credit is taxable, being treated as “other income” or “other operating income” for CT purposes.
After applying the corporation tax rate, the net benefit to the company usually falls in the 15 % to 16.2 % range, depending on the applicable tax rate.
Enhanced R&D Intensive Support (ERIS)
A carve-out remains for R&D-intensive SMEs. If a company is loss-making and qualifies as “R&D-intensive” (i.e. ≥ 30 % of total expenditure is R&D), it may access a more favourable credit treatment. Under ERIS, the company can deduct an additional 86 % of qualifying R&D costs in its adjusted trading loss (on top of the 100 % deduction) and claim a payable credit worth up to 14.5 %.
New Rules & Key Changes
Subcontracted R&D & EPWs
One of the most significant shifts is how contracted-out R&D is treated. Under the Merged Scheme, the claimant must be the party that originally commissioned or “intended and contemplated” the R&D, bears the decision-making risk, and retains control over the work.
In practice:
If Company A contracts Company B to do R&D for it, A may claim, provided it retains oversight and risk.
If Company B independently performs R&D then licenses or sells it, B might claim (if it retains the uncertainty and risk).
Many subcontract-type models must now be restructured or documented more rigorously to ensure clarity over who retains the technical risk.
Also, EPWs (externally provided workers) will have stricter geographic and PAYE-based tests under the Merged Scheme.
Overseas R&D Restrictions
A major policy reorientation is the restriction on overseas R&D costs. Under the Merged Scheme:
Overseas subcontractor or EPW costs generally do not qualify, unless very narrowly exempted.
To include any overseas work, claimants must satisfy a multi-step test showing it was unreasonable or impractical to carry out that function in the UK, and that it was integral to eligible work.
This change underscores the policy drive to retain skilled R&D activity and jobs domestically.
PAYE/NIC Cap on Cash Credits
Even under the Merged Scheme, when a claim results in a repayable cash credit (for loss-making companies), it is subject to a cap calculated as:
£20,000 + 300 % of the company’s PAYE and NIC liabilities from the accounting period.
This replicates the mechanism from the SME regime but recalibrates it in a unified scheme.
Transitional & Transitional-period Issues
Determining switch date: The new scheme applies for accounting periods beginning on or after 1 April 2024. If your year-end straddles that date, you may need to split it into two claims: one under the old regime, one under the new.
Legacy subcontractor contracts: Old contracts drafted under SME or RDEC rules may require amendment or supplemental agreements to align with the new requirements.
Carried-forward amounts & adjustments: Ensure any residual RDEC or SME relief absorbed in transitional years correctly flows into adjustments under the Merged structure.
Documentation legacy: Projects started before the change will need retrospective alignment to meet the stricter evidential standards.
Practical Steps for Businesses
Review existing project supply chains and contracts to determine who retains technical risk and control.
Map geographic exposure — if using overseas subcontractors or EPWs, assess the feasibility of re-shoring or restructuring before 1 April 2024.
Upgrade evidential discipline — tighten documentation, version control, experiment logs, and cost allocation.
Incorporate internal R&D governance routines (e.g. quarterly reviews, technical signoffs).
Model cash credit cap risk — especially for loss-making entities, simulate whether the PAYE/NIC cap will bind.
Conclusion
The Merged Scheme doesn’t just merge two reliefs, it redefines the behavioural incentives behind claims. While it reduces fragmentation, it heightens the importance of clarity, evidence, and foresight. Firms with mature internal processes and well-documented innovation stand to navigate the shift most effectively; those reliant on loosely documented retrospective claims will face increased scrutiny.