Merged R&D Expenditure Credit: How To Claim

The merged R&D scheme now applies to all companies, for accounting periods beginning on or after the 1st April 2024.

From accounting periods beginning on or after 1 April 2024, the RDEC scheme has merged with the SME to include all companies—large enterprises and SMEs alike.

Here’s a step-by-step guide to understanding the merged scheme, its benefits, and how to make your claim.

What is the merged R&D scheme?

The new merged R&D Expenditure Credit scheme is now the default R&D tax credit scheme for all UK companies conducting qualifying R&D, regardless of size.

Introduced in the Finance Act 2024, this unified scheme replaces:

• The previous RDEC scheme for large companies.
• The existing SME tax relief scheme for smaller businesses, except for R&D-intensive SMEs.

The merged scheme was set up to simplify the R&D tax credit landscape while maintaining the above-the-line credit structure of the original RDEC scheme.

Why is this important?

Credits appear in profit-and-loss accounts, making the financial benefits of R&D visible to stakeholders, investors, and public markets.

A brief history of the merged R&D scheme

The original RDEC scheme (Research and Development Expenditure Credit) was introduced in 2013 to replace the outdated Large Company scheme.

The key benefits of RDEC:

• Encouraged larger businesses to invest in innovation.
• Provided visible incentives through above-the-line accounting treatment.

Over time, the existing RDEC scheme became accessible to SMEs in certain circumstances, such as when claiming for grant-funded projects or subcontracted R&D. For accounting periods on or after 1 April 2024, the government merged RDEC with the SME scheme to:

• Simplify the scheme.
• Reduce fraud and error rates in SME claims.

It is very similar to the old RDEC scheme, with some of the benefits from the SME scheme, which is why it is often abbreviated to ‘merged RDEC’ by HMRC.

Who can make a merged R&D claim?

For accounting periods starting on or after 1 April 2024, the merged scheme applies to all companies conducting qualifying R&D activities.

The exception?

R&D-intensive SMEs, defined as businesses spending 30%+ of total costs on R&D, which claim under the Enhanced R&D Intensive Support (ERIS) scheme.

For accounting periods before 1 April 2024, the older rules apply:

• Large companies and certain SMEs claimed under RDEC.
• Most SMEs claimed under the SME scheme, and R&D-intensive SMEs were defined as businesses that spend 40%+ of total costs on R&D.

How much can you claim?

For accounting periods starting on or after 1 April 2024

The merged R&D Expenditure Credit (RDEC) scheme provides:

• 20% gross credit on qualifying R&D expenditure.
• Net benefit after corporation tax:
  • 16.2% for companies taxed at 19% (Small profits rate).
  • for companies paying tax in the marginal rate band (26.5%) is 14.7%
  • The Net RDEC at the main rate of CT (25%) is 15%

For Accounting Periods Before 1 April 2024

See RDEC article for old rates

See SME scheme article for old rates

Merged R&D scheme vs ERIS

R&D Scheme (from 1st Apr 2024)	Description	Net Benefit	Key Features
Merged R&D Expenditure Credit Scheme (RDEC)	The standard scheme for all companies doing R&D.	14.7% – 16.2% (depending on Corporation Tax rate)	Above-the-line credit, offsets Corporation Tax, PAYE/NIC cap applies.
ERIS Scheme	For loss-making R&D-intensive SMEs (at least 30% of total expenses on R&D).	Between 12.5% and 27%	Higher credit rates, not subject to Corporation Tax, PAYE/NIC cap applies.

How the merged R&D scheme works

The merged RDEC scheme retains much of the original RDEC structure but incorporates key features from the SME scheme.

Key Features:

1. Above-the-Line Credit
   • R&D credits are shown as taxable income.
   • Offsets Corporation Tax liabilities and can result in cash payments for loss-making companies.
2. PAYE/NIC Cap
   • This cap, adopted from the more generous SME scheme, limits the amount of credit you can receive based on your PAYE and NIC liabilities. It’s calculated as £20,000 plus 300% of those liabilities. This helps ensure the relief goes to companies genuinely doing R&D in the UK. If your claim exceeds the cap, you can carry the extra credit forward to use in future years.
3. Contracted Out R&D
   • Introduces new rules for subcontracted R&D, modelled on the SME scheme.
   • Companies contracting R&D to others can claim for those costs.
   • Companies contracted to perform R&D can only claim in specific circumstances (e.g., for charities, universities, or overseas entities).
4. Overseas R&D
   • Limits relief for subcontractors and Externally Provided Workers (EPWs) based overseas, unless specific exceptions apply.
5. Subsidised R&D
   • Removes restrictions on subsidised expenditure, simplifying claims for grant-funded R&D projects.

Qualifying costs for the merged R&D scheme

The RDEC scheme allows claims for a range of R&D-related costs, including:

1. Staff Costs
   Salaries, employer NICs, and pensions for employees directly involved in R&D.
2. Consumables
   Materials, fuel, and power used up or transformed during R&D activities.
3. Software
   Licenses used specifically for R&D.
4. Externally Provided Workers (EPWs)
   Workers hired under your company’s direction.
5. Subcontracted R&D (now the same as the SME scheme)

For more details, see our guide to qualifying R&D costs.

Preparing and submitting a merged R&D scheme

Part 1: Identify qualifying projects   

The first step to claiming R&D tax credits is identifying which of your projects qualify. Understanding the eligibility criteria is key to determining if your work meets the requirements.

It’s also good to collaborate with the “competent professional” to gather all the necessary evidence and technical data to demonstrate how your R&D qualifies. It’s best practice to do this in-year!

Part 2: Break down activities and costs

Next, you’ll need to outline the specific activities and costs associated with your R&D projects. Start by identifying the direct and indirect activities that qualify, then list all the related costs—such as employee wages, materials, and other expenses. 

It’s important to accurately allocate these costs, ensuring they are directly tied to qualifying R&D activities. You’ll also need to calculate what percentage of each cost is eligible for relief under the RDEC scheme. Taking the time to do this thoroughly will help ensure it’s compliant.

Part 3: Prepare the Additional Information Form (AIF)

Since August 8th, 2023, claimants are required to submit an additional information form along with the CT600/CT600L. As the name suggests, this form is designed to provide more detailed information, including financial data and technical details about your R&D project. However, it’s important to note that this form does not replace an R&D tax claim report—we strongly recommend submitting the report alongside it.

Part 4: Merged R&D scheme 7 steps

The merged RDEC scheme uses a 7-step process to calculate your final credit. Here’s how it works:

1. Offset corporation tax liabilities: If you have any existing corporation tax liabilities, they are offset against your gross RDEC amount.
2. Apply the notional tax rate:
   • Loss-making/small profit companies (19% Corporation Tax): A 19% notional tax rate is applied to your gross RDEC amount.
   • Other companies (25% Corporation Tax): A 25% notional tax rate is applied to your gross RDEC amount.
3. Limit the credit to the R&D PAYE/NIC cap: This step is where the PAYE cap might come into play. If your credit exceeds the cap, the excess is carried forward to future periods.
4. Honour corporation tax liabilities: If you have any corporation tax liabilities from previous periods, they are offset against your remaining credit.
5. Surrendering the credit for group relief: You can choose to surrender your credit to another company within your group to offset their tax liability.
6. Honour other tax liabilities: If you have any other outstanding tax liabilities (e.g., VAT), they are deducted from your remaining credit.
7. Credit paid after HMRC review: If your company is a going concern and your tax return is not under enquiry, the remaining credit is paid out to you.

Example Calculations

How does the merged R&D scheme impact you?

For profit-making and non-R&D Intensive loss-making SMEs:

• The merged scheme applies for accounting periods starting on or after 1 April 2024.
• Key changes include:
  • Restrictions on overseas EPWs and subcontractors.
  • Removal of restrictions for subsidised expenditure.

For large companies and SME subcontractors:

• New rules for contracted-out R&D require careful assessment of supply chains.
• Adjustments to PAYE/NIC caps ensure flexibility in claims.

For R&D-Intensive SMEs:

• ERIS remains the most generous option, offering up to 26.97% relief. However, this is dependent on your trading loss.
• A one-year grace period ensures stability for companies near the 30% intensity threshold.

EmpowerRD can help

Navigating the merged R&D expenditure credit scheme or understanding its history doesn’t have to be daunting.

At EmpowerRD, we’ve helped over 1,200 companies claim £250m+ in relief. Whether you’re transitioning from the SME scheme or adjusting to the new rules, we’ll make the process simple and stress-free.

Want to optimise your claim? Contact us today.