The merged R&D scheme – An overview of the changes and impact to the industry

The merged R&D tax relief scheme is now in effect for accounting periods beginning on or after 1 April 2024 and has been introduced to replace the old RDEC and SME schemes, alongside the enhanced R&D intensive support (ERIS). 

The introduction of the merged scheme marks a shift towards simplifying the existing landscape of R&D incentives, making it more accessible and streamlined for companies across various sectors.  

The core definition of what constitutes R&D (DSIT guidelines) for tax purposes has not changed and claimants will still need to prove that their project sought to achieve an advance in science or technology. 

The merged scheme R&D expenditure credit

Both large companies and SMEs (excluding loss-making, R&D-intensive SMEs, see below) will claim under the new merged scheme.   

The qualifying expenditure and calculations under the merged scheme follow the same method as the old RDEC scheme, where companies will claim a 20% RDEC rate on eligible R&D expenditure identified (small profits rate (SPR) applied to loss making companies, main tax rate applied otherwise). 

Under the previous RDEC scheme, the tax credit was capped at the lower of: 

• Total RDEC for period less Corporation Tax at main rate.  
• Company’s total PAYE and Class 1 NICs spent on staff involved in R&D activity.  

The payable credit cap found in the current SME scheme has been incorporated into the new merged scheme legislation. This allows companies to include the total PAYE and Class 1 NICs spent on all staff during the period and not just staff involved in R&D activities. 

Although the definition of R&D remains unchanged under the merged scheme, there have been significant changes to the types of qualifying expenditure. 

Restriction on overseas R&D, including expenses related to overseas subcontractors and Externally Provided Workers (EPWs)

Overseas R&D expenditure may qualify for relief where the following exceptions apply:  

• The conditions necessary for the R&D are not present in the UK, 
• the conditions are present in the overseas territory, and,  
• it would be wholly unreasonable for the claimant to replicate the conditions in the UK. 

Treatment of contracted out R&D

What companies can claim for subcontracted R&D has been a complex area of the scheme for many years. However, the rules on contracted R&D have been clarified in the merged scheme to ensure tax relief is awarded to the company making key R&D decisions and assuming the associated financial risk. 

The new rules introduce a specific definition of “contracted out R&D”, meaning companies that undertake R&D on behalf of others generally cannot claim relief themselves.  

The changes affect both large and small companies. Larger firms may need to review their contracts, structures and position within the supply chain. SMEs could face more uncertainty, especially as the rules have been unclear in recent years. To generalise: 

• Subcontractors can only claim if it was their decision to undertake R&D and they are taking the financial risk. 
• Subcontractors can claim if the customer company is not eligible to claim R&D tax relief in the UK (namely non-tax paying bodies, such as charities or universities, or overseas companies). 

However, the changes now allow SMEs with granted funded and subsidised projects to claim under the merged scheme without complexity. This is good news for innovative start-ups in sectors where grant funding is prevalent.  

Enhanced R&D intensive support

The enhanced R&D intensive support scheme (ERIS) only applies to loss-making R&D intensive SMEs for expenditure incurred from 1 April 2023 onwards. 

The thresholds to be considered R&D intensive depends on the accounting period under review: 

• 40% threshold for expenditure incurred on or after 1 April 2023. 
• 30% threshold for accounting periods beginning on or after 1 April 2024. 

There is also a grace period, which means you can claim if both of the following apply: 

• You met the intensity threshold in your last 12-month accounting period. 
• You made a valid SME or ERIS R&D claim in that period on expenditure incurred on or after 1 April 2023. 

Companies eligible to claim under the ERIS receive an expenditure uplift of 86% with an increased payable tax credit at 14.5%. This follows the same calculation method as the previous SME scheme and companies can receive up to 27p per £1 back on their R&D investment. 

R&D support with Gerald Edelman

For further information, see our article on R&D tax relief for SMEs and our essential guide to R&D claims. 

Alternatively, get in touch with our R&D tax credit specialists to discuss your next claim.