The merged R&D expenditure credit (RDEC) scheme (“the merged scheme”) is now well-established, and serves as the primary R&D incentive for accounting periods commencing on or after 1 April 2024. For most seasoned claimants the focus has now shifted from understanding the legislation to dealing with its practical consequences.

While the core definition of qualifying R&D remains unchanged (in line with the DSIT guidelines), the merged scheme has materially altered who can claim, which costs qualify, and how the benefit is recognised in the accounts. Claimants now have experience of operating under the new rules and many businesses are finding that the outcomes are not what they initially expected.

What’s changed and who is affected

Although the government’s intention was to simplify R&D tax relief by replacing the SME and RDEC schemes with a single merged scheme, the practical impact has been far more complex. It is clear that there are both winners and losers, and that many businesses may need to revisit how they structure, track, and plan their R&D activity.

The R&D scheme now has just two strands: the single merged RDEC scheme, which is suitable for most claimants, and a separate Enhanced R&D Intensive Scheme (ERIS), which has been retained to provide additional support for lossmaking, R&D intensive SMEs.

While the intention was simplification, the reality is more nuanced. The most complex area under the merged scheme relates to contracted out R&D and overseas expenditure, both of which require careful analysis. For many businesses these issues are no longer theoretical; they are showing up in reduced claims, cashflow timing challenges, lost entitlement on subcontracted work, and increased administrative burden.

Expenditure treatment and accounting impact

Under the merged scheme, R&D relief is provided as an above the line credit, calculated as a percentage of qualifying R&D expenditure. This credit is recognised as taxable income in the profit and loss account, which can positively impact KPIs such as EBIT.

While the calculation itself is simpler, this creates new challenges:

• The credit is often material to the accounts

• A reliable R&D estimate is needed much earlier in the financial reporting cycle

• R&D work must be aligned more closely with audit and accounting timetables

There is also a cashflow consideration. For businesses within HMRC’s quarterly instalment payment regime, the merged scheme credit does not reduce instalments, as it sits outside the corporation tax computation. This can create a timing mismatch until the corporation tax return, including the R&D claim, is filed.

For companies that sit within the ERIS scheme, the benefit continues to depend on trading losses. However, planning for an exit from ERIS (due to profitability or reduced R&D intensity) is critical. The drop off in benefit can be substantial, and without forward planning this can significantly impact cashflow forecasts.

Subcontracted R&D: Who is entitled to claim?

Under the merged scheme, all claimants can include expenditure on contracted out R&D activities. However, after the first year of claims under the new scheme, it has become clear that the accompanying restrictions on who is entitled to claim have had a significant, but unexpected, impact.

In broad terms:

• A company subcontracted to carry out R&D for another UK company will generally no longer be entitled to claim

• This disproportionately affects SMEs, who often act as subcontractors within larger R&D programmes managed by large corporates

• Larger companies commissioning development work are more likely to benefit

HMRC has recognised limited exceptions:

• Where R&D is subcontracted by an overseas company, and the UK subcontractor initiates the R&D, a claim may still be possible

• For UK to UK contracts, entitlement depends on whether it is reasonable to assume that R&D of that nature was intended when entering the contract

In practice, this means contract wording, commercial intent, and behaviour in delivery all matter. Getting this wrong can result in an invalid claim or the loss of relief entirely. Seeking professional advice at this stage is therefore essential.

Overseas R&D costs: A strategic issue, not just a compliance one

As part of the new scheme, restrictions on overseas R&D expenditure were introduced, applying from 1 April 2024. In most cases, R&D carried out outside the UK is no longer claimable unless strict exemption criteria are met. Importantly, the following are not considered to be valid reasons under these criteria:

• Lower overseas costs

• Accessing overseas talent

• Wage differentials or staff provider convenience

This change has had a significant impact on software and technology businesses that recruit globally. Many are now reassessing where their R&D is carried out and how incentives influence long term resourcing strategy. There is also an administrative burden that applies. HMRC now expects companies to track:

• Where R&D activities take place

• Company registration details

• PAYE references for externally provided workers

For businesses with large contractor populations, this is time consuming unless built into real time data collection processes. We help you embed these requirements throughout the year, rather than dealing with them at claim stage.

National Insurance Contributions (NIC)/Pay-As-You-Earn (PAYE) cap

To prevent abuse of the merged RDEC credit HMRC have incorporated a cap on the cash payments made to a claimant company. The merged scheme adopts the more generous PAYE/NIC cap that limits the cash payable to loss making companies to:

• £20,000 plus

• 300% of the company’s PAYE and NIC liability for the period

This cap should have a minimal impact on most businesses employing staff in the UK, but where it can cause issues and limit the benefit is where a company is using a large number of contractors or subcontracting a large element of the development project. Additionally, group structures can reduce the available cap where staff from other UK linked entities work on the development project. Therefore, it is worth discussing with an advisor when considering group restructuring or engaging contractors in case these working relationships limit the R&D credit available to the claimant company.

What should you do now?

Key actions to consider:

1. Review existing claims and contracts  If you often undertake R&D for other organisations, identify projects that may now fall within your customer’s R&D claim rather than your own. Contractual intent around who initiates R&D is critical.

2. Turn restrictions into opportunity  If you can no longer claim as a subcontractor, consider whether your technical teams could support customers with claim documentation as a chargeable service.

3. Revisit R&D resourcing strategy  If overseas costs are excluded, this may be the right time to model alternative structures or locations and assess where R&D incentives can be maximised legitimately.

The changes introduced as part of the new merged scheme have had a significant impact. Many businesses only fully understand the impact of the changes once a claim has been prepared and the benefit recognised in the accounts. A proactive review now can prevent avoidable cashflow issues, lost entitlement, or HMRC challenges in future periods.

Get in touch

Our specialist R&D tax team supports businesses through every stage of the transition to the merged R&D scheme. We can help identify which scheme your business would qualify for, review your R&D activity, prepare robust and defensible claims, and support planning around resourcing, incentives and future R&D strategy.

We work with clients throughout the year, not just at claim time, and aren’t afraid to challenge assumptions where needed. Our focus is on helping you build robust, compliant claims while optimising the benefit available.

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