The merged R&D scheme explained

One scheme in place of two

Until 2024, UK R&D relief ran as two parallel schemes: a generous deduction-based scheme for SMEs, and the R&D Expenditure Credit (RDEC) for large companies and some SMEs. HMRC’s reform merged them. The policy paper puts it directly: the measure combines the current RDEC and R&D SME scheme into a merged scheme, established as an above the line credit.

The merged scheme applies to accounting periods beginning on or after 1 April 2024. That start date matters: it is not a tax-year switch, it follows your own accounting period. A company with a December year end, for example, came into the merged scheme for its year beginning 1 January 2025.

How the credit works

The merged scheme gives an expenditure credit calculated as a percentage of your qualifying R&D spend, currently 20%. It is not a deduction that quietly reduces taxable profit. It is a credit that appears above the line, as if it were trading income, and it is taxable.

For a profitable company, the credit reduces the Corporation Tax bill. For a loss-making company, a series of offsetting steps applies, and any remaining amount can be paid in cash, subject to a cap based on the company’s PAYE and National Insurance. Because the credit is taxed, the net benefit is lower than the headline rate, and the exact value depends on your Corporation Tax position. The arithmetic, with worked examples, is on how much you can claim.

Who claims under it

The claimant has to be a company that is trading and chargeable to UK Corporation Tax. Size no longer decides the scheme: large companies and SMEs claim under the same rules. The one structural exception is Enhanced R&D Intensive Support (ERIS), a more generous route that remains open only to loss-making, R&D-intensive SMEs. If that might be you, read ERIS explained; everyone else is in the merged scheme.

The activity itself still has to meet the statutory definition of R&D, which is narrower than the everyday meaning. That test lives on what counts as R&D for tax purposes, and the company-level conditions, including going concern, are on who qualifies.

Contracted-out R&D: whose claim is it?

The merged scheme rewrote the subcontracting rules, and this is where real money moves between companies. HMRC’s manual states the general rule plainly: only the party who takes the decision to undertake or initiate the R&D can claim.

In practice, that is judged from the contract and the surrounding circumstances. Where a customer commissions work and it is reasonable to assume the customer intended or contemplated that R&D would be done to fulfil the contract, the R&D belongs to the customer. A contractor can still claim for R&D it initiates itself, but normally only where the work was not contracted out to it in this sense. If your business does technical work to other people’s specifications, or commissions technical work from others, this rule decides whose claim it is, and it deserves careful attention before anyone claims.

Overseas costs: the door has mostly closed

For current periods, spending on contractors for R&D undertaken overseas, and on externally provided workers whose earnings are not subject to UK PAYE, is generally excluded from qualifying expenditure. HMRC’s manual is explicit that such spend is excluded under both ERIS and the merged scheme unless a narrow statutory exception applies. Broadly, the exception covers cases where the conditions necessary for the R&D are not present in the UK and cannot reasonably be replicated here.

If your R&D model relies on overseas development teams, this restriction is likely the biggest single change to your claim value under the new regime. The detail is on overseas costs and the restrictions.

Grant-funded projects: an old problem removed

Under the old SME scheme, subsidised expenditure, including grant-funded project costs, was restricted. The merged scheme dropped that restriction. HMRC’s policy paper states that the subsidised-expenditure rules of the old SME scheme were not carried forward. Receiving a grant covering part of your R&D costs no longer reduces the relief available on that project. For companies mixing Innovate UK funding with their own R&D spend, this is one of the genuinely good changes. The detail sits on grants and R&D relief together.

What this page does not cover

The activity test, the company-level conditions, the money, and the claim mechanics each have their own page: what counts as R&D, who qualifies, how much you can claim, and how to make a claim. And the standing point that applies across all of them: HMRC paying a claim is not HMRC approving it. The company remains responsible for what it claims.

Sources

1. HMRC, Research and Development (R&D) tax relief: the merged scheme and enhanced R&D intensive support, gov.uk
2. HMRC policy paper, Merger of current SME and RDEC schemes, gov.uk
3. HMRC, CIRD161000 (contracted out R&D: overview), Corporate Intangibles Research and Development Manual, gov.uk
4. HMRC, CIRD150500 (overseas restrictions: overview), Corporate Intangibles Research and Development Manual, gov.uk