How Does the Merged R&D Tax Scheme Work?

The Merged Scheme is the most significant change to R&D tax relief since its introduction. From April 2024, the two schemes that previously ran side by side (the SME scheme and the RDEC scheme) have been replaced by a single method for calculating R&D tax credit claims.

Here's what the Merged Scheme involves, how the rates work, and what you need to do differently.

What is the Merged Scheme?

The Merged Scheme is a new version of the R&D tax credit scheme for UK companies. It allows eligible companies to claim back some of their R&D costs as either a reduction in Corporation Tax or as a cash credit.

HMRC had been running two parallel R&D tax relief schemes for some time. The SME scheme applied to smaller companies; the RDEC scheme applied to large companies and, in some cases, SMEs with subsidised projects. Having two schemes created complexity, inconsistencies and significant scope for error.

The Merged Scheme was HMRC's answer: a single, above-the-line expenditure credit that applies to all companies, regardless of size or project type, based on the prior RDEC scheme. The intent is simplification, though the practical detail still requires care.

For information on the old SME and RDEC schemes being phased out, see our guide: SME vs RDEC: Which R&D Tax Scheme Should I Use?

Who does the Merged Scheme apply to?

The Merged Scheme applies to all companies making an R&D tax credit claim for an accounting period beginning on or after 1 April 2024. There is no option to use the old SME or RDEC schemes, even where they would be more favourable.

The only exception is the Enhanced R&D Intensive Support (ERIS) scheme, which remains available to eligible loss-making SMEs. More on that below.

What is the Merged Scheme rate?

The headline rate of the expenditure credit is 20% of qualifying R&D expenditure.

Because the credit is treated as taxable income (it's an above-the-line credit, meaning it appears in pre-tax profit), the real-world benefit depends on the corporation tax rate the company is subject to. In practice, this works out to:

• 16.2% net benefit for companies paying corporation tax at the small profits rate (19%)
• 15% net benefit for companies paying at the main rate (25%)

This is a lower headline return than the old SME scheme offered, but the scope of claimable costs has broadened in some cases, particularly for subcontracted expenditure.

What costs can you claim?

The eligible cost categories are broadly the same as under the previous schemes:

• Staff costs
• Subcontracted R&D costs
• Externally provided workers (EPWs)
• Consumable items
• Software licences
• Data licences and cloud computing costs
• Payments to clinical trial volunteers

Two areas have changed materially for some companies.

Subcontractors

Under the old RDEC scheme, large companies could not claim for subcontracted R&D costs. That restriction is now gone. All companies can now claim 65% of qualifying subcontracted R&D costs (the 65% rate is retained to account for the contractor's profit margin).

However, there is a clarification in place under the Merged Scheme. The condition is that the company claiming must have "intended or contemplated" the R&D before it began. This should be documented in writing at the point of engagement. HMRC introduced this requirement specifically to prevent both the contracting party and the contractor from claiming for the same activity.

See our guide for more details on who has the right to claim for subcontracted work: Who Can Claim For Subcontracted R&D?

Overseas expenditure

For all claims under the Merged Scheme, R&D work must be carried out in the UK to qualify. Staff costs, EPW costs, and subcontracted costs can only be claimed where the individual is physically performing the R&D in the UK. Nationality and company registration country are irrelevant; it's where the work happens that counts.

There is a narrow exception: where the conditions required for the research are not available in the UK and cannot reasonably be replicated here (for example, studying a disease not found in the UK, or using specialist testing equipment unavailable domestically). Lower costs or faster turnaround abroad are not valid reasons.

For more information on this new rule, including examples of exceptions, see our guide: Understanding the New Overseas Rules for R&D Tax Credits in the UK

How does the calculation work?

The Merged Scheme follows the same methodology as the old RDEC scheme. The expenditure credit is calculated at 20% of total qualifying R&D costs and is treated as taxable income in the company's profit and loss account.

Here is what that looks like in practice:

Company A incurs £500,000 in qualifying R&D expenditure for an accounting period beginning 1 May 2024. It pays corporation tax at the main rate of 25%.

The expenditure credit is £100,000 (20% of £500,000). After corporation tax on the credit, Company A receives a net benefit of £75,000 (which is 15% of the original R&D spend).

The credit is declared in the CT600 and supplementary form CT600L. It must first be used against your existing tax liability; if you’ve got more relief than your tax liability, you can carry the excess forward, use it against other liabilities, surrender to a group company or, as most companies prefer, get it paid as a cash credit!

What about the ERIS scheme?

Loss-making SMEs that spend heavily on R&D may be eligible for the Enhanced R&D Intensive Support (ERIS) scheme instead.

To qualify, a company must:

• be a small or medium-sized enterprise (SME)
• make a trading loss for tax purposes before relief is calculated
• meet the R&D intensity condition: at least 30% of total expenditure must be qualifying R&D costs

The ERIS scheme follows the structure of the old SME scheme more closely. Companies can deduct an additional 86% on qualifying R&D expenditure, on top of the usual 100% deduction, and then claim a payable tax credit at 14.5% of the resulting surrenderable loss. The real-world benefit is 26.97%, considerably higher than the Merged Scheme rate.

A one-year grace period applies for companies that met the intensity threshold in the previous accounting period and made a valid claim under the SME or ERIS scheme.

What do you need to do?

If you've claimed before, the preparation process is largely the same. The key differences are the overseas restriction on staff and contractors, and the new subcontracting rules if you engage third parties to carry out R&D.

Two forms are now mandatory:

• Advance Notification Form: required if this is your first claim, or if you haven't claimed in the last three years. It must be submitted within six months of the end of the accounting period. If it’s not submitted and you needed it, your claim won’t be accepted.
• Additional Information Form (AIF): required for all claims since August 2023. This sets out the details of each qualifying project and is your first line of defence against a compliance check from HMRC.

Key takeaways

• The Merged Scheme replaces the SME and RDEC schemes for all accounting periods beginning on or after 1 April 2024. There is no opt-out.
• The headline rate is 20%, with a net benefit of between 15% and 16.2% depending on the corporation tax rate.
• All companies can now claim subcontracted R&D costs, subject to the 65% rule and the "intend or contemplate" requirement.
• Overseas R&D is no longer claimable, with narrow exceptions.
• Loss-making SMEs with high R&D intensity may qualify for the ERIS scheme at a higher rate of 26.97%.
• Two forms are mandatory: the Advance Notification Form (where applicable) and the Additional Information Form.

Understanding which scheme applies to your company and how to structure your claim correctly takes time. If you're preparing a claim under the Merged Scheme for the first time, or if you have subcontractors or overseas workers to consider, it's worth getting specialist input before you file. Contact Myriad to discuss your situation with our team.