The Merged R&D Scheme- All you need to know 

The UK’s R&D tax relief system is always changing. From April 2024, existing tax schemes were combined into a single, merged R&D scheme. Read on to understand what the changes mean, who’s affected, and how your business can maximise your claims under the new rules.

What is the merged R&D scheme? 

The merged R&D scheme, also known as the Merged R&D Expenditure Credit or New RDEC or the Combined R&D programme, is a unified UK tax relief program introduced to simplify and support innovation. Effective for accounting periods beginning on or after April 2024, it merges the previous SME and RDEC schemes. Applicable from tax periods ending December 2025, the scheme provides tax credits for companies investing in R&D to improve existing products or services in science or technology. Key features include a single rate of relief and enhanced support for loss-making firms. Contracted out R&D refers to research outsourced by one company to another for qualifying activities.

Why has the merged scheme been introduced?

The merged R&D scheme has been introduced to encourage greater private sector investment in innovation, providing a more accessible form of tax relief. The scheme simplifies the previously complex system of separate schemes, making it easier for companies to make claims. The unified structure is also designed to help reduce fraud and misuse. This makes the scheme more robust, empowering individual businesses and supporting the UK’s position as a leader in science and technology innovation.

Who is affected by the merged R&D scheme? 

The merged R&D scheme affects most businesses (including SMEs and large companies) that currently claim R&D tax relief. As a result, businesses must understand the new qualifying criteria and claim requirements, and how contractual relationships impact eligibility: 

• SMEs must determine whether they qualify as R&D intensive (spending 30% or more of total costs on R&D) to access enhanced relief or if they fall under the standard merged scheme. 
• SMEs with less than 30% R&D spend, SME subcontractors, R&D intensive SMEs, and large companies will all experience different implications.

Understanding these criteria ensures compliance and maximises relief under the new structure. 

What are the merged R&D rates? 

Under the merged R&D scheme, most businesses (including profit-making SMEs and large companies) will now claim relief through the same system. This scheme is based on the RDEC model and offers a 20% “above the line” taxable credit on qualifying R&D expenditure. The amount of relief ultimately received depends on the company’s tax position: 

How does the scheme apply to different businesses?

Businesses will be affected by the scheme in different ways/ largely related to what type of business they are. We have broken down the scheme’s impact for different types of businesses below so that you can better understand your positioning under the new scheme:

Profit-making and non-R&D intensive SMEs

SMEs spending less than 30% of total expenditure on qualifying R&D must now claim under the merged scheme. This redefined approach to contracted-out R&D may limit claims depending on who directs the work, as under the merged scheme, stricter rules apply to expenditure on externally provided workers (EPWs) and subcontractors not on PAYE. In contrast, previously restricted subsidised R&D is now allowed under the new rules.

Large companies and SME subcontractors 

Although the merged scheme is based on the RDEC model, larger businesses are still affected by the changes. New restrictions limit what R&D activities qualify for relief, particularly around subcontracted work. For example, payments to R&D subcontractors are now more tightly defined. Further changes to the PAYE/NIC cap on payable RDEC could also affect the amount large companies can claim.

Loss-making R&D intensive SMEs

R&D intensive loss-making SMEs can access an enhanced tax credit rate if eligible. For expenditure incurred on or after April 1st 2023, the threshold is 40% of total spending on qualifying R&D. From April 1st 2024 (for accounting periods beginning on or after this date), the threshold has lowered to 30%. Other key changes include a new definition of contracted-out R&D, tighter restrictions on overseas subcontractor costs, and the removal of limits on subsidised R&D eligibility.

How Rayner Essex can help

At Rayner Essex, we offer expert support to help businesses maximise the benefits of R&D through accurate accounting and specialist advice. We understand the complexities of research and development tax relief, allowing us to work closely with clients to identify eligible projects and ensure continued compliance with HMRC requirements. Our R&D specialists help businesses unlock invaluable tax savings to reinvest in innovation and growth. 

To find out more about how our team can support your business to maximise the benefits of the merged R&D scheme, get in touch with our specialists today. Feel free to also read our article on R&D tax relief: navigating the new merged scheme in 2024.

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