Merged R&D scheme - everything you need to know

For accounting periods beginning on or after 1 April 2024, the merged R&D tax relief scheme is the principal R&D incentive. Here, we explain how the incentive works, its key features and how to calculate a claim under it.

At ForrestBrown, we provide proactive, actionable advice for forward-thinking businesses navigating claims under the merged R&D scheme.

What is the merged R&D scheme?

The merged R&D expenditure credit is now the main R&D tax credit scheme for businesses of all sizes. For accounting periods beginning on or after 1 April 2024, it is the default means of claiming R&D tax relief. Its introduction represented a significant change to R&D tax incentives.

Alongside the merged scheme, enhanced support for R&D intensive loss-making SMEs (ERIS) exists.

The merged scheme brought together two of the UK’s previous R&D tax relief incentives into a single scheme:

• Enhanced tax relief and payable credits for qualifying SME expenditure.
• R&D expenditure credit (RDEC) for large businesses and SMEs with subcontracted R&D activity or subsidised R&D expenditure.

The merged scheme is sometimes referred to as the merged scheme R&D expenditure credit or merged scheme RDEC, new RDEC or simply the single scheme.

What are the merged R&D scheme rates?

The table below shows the R&D tax relief rates under the merged scheme that applies for accounting periods beginning on or after 1 April 2024.

How the merged R&D scheme works

An above-the-line expenditure credit

All companies, regardless of size (with the exception of R&D intensive SMEs), will receive an above-the-line credit under the merged scheme. This means a credit is offset against the company’s Corporation Tax liability.

In some cases, where all Corporation Tax liabilities are discharged, the remainder may be paid in cash to your business.

How it differs from ‘old’ RDEC

The merged R&D scheme is similar to the legacy RDEC scheme in a lot of ways. There are some notable distinctions, usually where aspects of the historic SME scheme have been incorporated into the merged scheme.

Businesses used to claiming under the previous RDEC incentive should be aware of the following differences:

• New rules for contracted-out R&D determining which company in a supply chain is eligible to claim.
• Qualifying payments to subcontractors are no longer restricted only to payments to a qualifying body, individual or partnership.
• Previously delayed limitations on relief for overseas expenditure on EPWs and subcontracted R&D are included.
• The merged scheme adopts the more generous version of the payable credit cap found in the previous SME scheme. Read more background on this in our blog on the PAYE/NIC cap.
• Payments to qualifying bodies for independent R&D are no longer eligible for relief.

The treatment of contracted-out R&D

Subcontracted R&D is a particularly complex area. The merged scheme aims to target R&D tax relief to the company making the decision to carry out R&D and in turn bearing the risk.

Large companies need to evaluate how the new rules apply to commercial structures and contracts, potentially for the first time.

Subsidised expenditure

Companies in receipt of a subsidy or grant funding for R&D activity will no longer see the amount of available R&D relief reduced (as happened under the previous SME scheme). This means that loss-making R&D intensive SMEs might be able to make a claim for their grant-funded projects under the SME regime for the first time.

This is a welcome simplification, particularly given the controversy regarding HMRC’s application of the legislative provisions restricting relief for subsidised R&D expenditure.

Forward-thinking businesses now have the opportunity to combine different incentives such as grant funding and Patent Box relief to optimise their innovation funding. ForrestBrown’s holistic approach makes us ideally placed to support you with your funding strategy.

The impact of the merged scheme

There are differences between the merged scheme and previous R&D schemes, as set out above. You need to be aware of these nuances, which ones impact you will depend on the type of business you are and the contractual arrangements under which you are carrying out R&D.

SMEs: If you’re an SME, you need to identify whether you qualify for enhanced R&D intensive support (ERIS) or fall under the merged scheme.

NOTE: Remember, to be classed as an SME for R&D tax purposes you must have fewer than 500 staff, and either a turnover of no more than €100 million or gross assets of no more than €86 million.

If you are an SME, loss-making for tax purposes and spend at least 30% of your total expenditure on qualifying R&D, then you may be eligible to claim under ERIS. All other businesses with qualifying R&D activity now fall under the merged scheme.

You will also need to consider whether the decision to carry out R&D sits within your business or elsewhere in the supply chain. Generally, companies will not be able to make a claim under either incentive if R&D has been contracted to them.

To find out more about the changes specific to you, follow the links below:

Are you:

An SME with less than 30% of total expenditure on qualifying R&D (the threshold to qualify for an enhanced rate for R&D intensive SMEs).

An SME subcontractor or SME with subsidised R&D currently claiming under RDEC. Remember, the treatment has changed under the merged scheme.

A loss-making R&D intensive SME with more than 30% of total expenditure on qualifying R&D.

A large company with 500 or more staff and either more than €100 million turnover or €86 million gross assets.

What do I need to do?

Here are some considerations and recommended steps for your business.

If you want to benefit from tailored advice, reach out to ForrestBrown today.

Key points for profit-making and non-R&D intensive loss-making SMEs

If your business spends less than 30% of your total expenditure on qualifying R&D then, for your first accounting period beginning on or after 1 April 2024, you will need to claim R&D via the merged scheme.

You should be aware of the following important changes:

• The different mechanism for calculating relief.
• The new definition of contracted-out R&D.
• Restrictions on eligible expenditure for overseas EPWs and subcontractors and EPWs not subject to PAYE.
• The removal of restrictions for subsidised R&D expenditure.

Key points for large companies, SME subcontractors and SMEs with subsidised R&D

Although the merged scheme is based on the RDEC relief scheme, there are some key areas of impact for large companies:

• New restrictions on claiming for R&D contracted out to the company.
• Changes to the PAYE/NIC cap on any payable RDEC.
• Eligibility of payments to R&D subcontractors for work carried out in the UK.
• Restrictions on eligible expenditure for EPWs not subject to PAYE.
• Removal of relief for payments to qualifying bodies for independent R&D.

Find out more about:

Key points for loss-making R&D intensive SMEs

Alongside the newly merged R&D scheme, enhanced rates of relief for R&D intensive loss-making SMEs (introduced in April 2023) continues to operate under the current SME model.

Loss-making SMEs whose R&D expenditure is greater than 30% of total spend, but less than 40%, are eligible for the enhanced SME rate for their first accounting period beginning on or after 1 April 2024.

Key considerations for these companies include:

• The new definition of contracted-out R&D.
• Restrictions on eligible expenditure for overseas subcontractors and EPWs not subject to PAYE.
• The removal of restrictions for subsidised R&D expenditure.

How ForrestBrown can help

As the UK’s leading specialist R&D tax consultancy, we’re passionate about securing incentives and reliefs to enable forward-thinking businesses to shape what’s next.

We’re at the forefront of policy, engaging in every relevant consultation and championing the needs of innovative businesses. We deliver market-leading technical tax advice and actionable business outcomes tailored to your needs.

Why choose ForrestBrown to help you navigate the merged scheme