R&D tax relief has changed – here’s what you need to know about the new merged scheme

The UK government is rolling out a major update to R&D tax relief.

The two existing schemes – one for SMEs and one for larger companies – are being combined into a single, merged scheme. If your company claims R&D tax relief, these changes could affect how much you can claim, what you can claim for and how the money is paid to you.

Depending on your company size, you’ll either fall into the merged scheme or – if you’re a smaller, R&D-heavy business – you may still qualify for R&D intensive support under slightly different rules.

Let’s break down what’s changing, and what it means for your next claim.

What’s changing with R&D tax relief from April 2024?

Starting from 1 April 2024, the UK’s two existing R&D tax relief schemes are being replaced with a single, unified system.

Previously, there was:

• One scheme for SMEs (with enhanced relief and repayable credits)
• Another scheme for larger companies called RDEC (Research & Development Expenditure Credit)

Now, both will be brought together under one simplified scheme, designed to:

• Level the playing field across business sizes
• Make the system easier to administer
• Reduce fraud and error in claims

The new merged scheme is sometimes called the ‘single scheme’ or ‘new RDEC’. It’s been designed to work in a similar way to the old RDEC scheme – but with some important changes to rates, eligibility and how claims work in supply chains.

What are the new net benefit rates of R&D tax relief?

How does the merged scheme work?

Under the new rules, most businesses will receive an ‘above the line’ credit for eligible R&D costs. That means instead of reducing your tax bill behind the scenes, the credit shows up more clearly in your company’s accounts – improving your bottom line and making the benefit more visible.

• If your company owes Corporation Tax, the credit is used to reduce your tax liability
• If there’s anything left over (for example, if you’re loss-making), you can choose to receive some or all of the remainder as a cash payment, subject to a few conditions

This approach is based on the existing RDEC model – but there are a few key updates you’ll need to be aware of under the merged scheme.

What’s changed?

Here are the main ways the merged scheme differs from the previous rules:

Tighter cap on cash payments

Under the merged scheme, there’s a limit on how much of your R&D claim you can receive as a cash payment – and it’s now based on how much your company spends on UK payroll taxes.

This cap follows the same rules as the SME scheme and is calculated as:
£20,000 + 300% of your total PAYE and NIC liability for the period

This means:

• If your team is small, or if most of your R&D is outsourced, your cash credit may be significantly lower than before
• You may not be able to claim the full amount in one go – but any unclaimed credit can roll forward into future tax periods until it’s used up

This cap replaces the more flexible approach under the old RDEC scheme and is an important consideration when planning future R&D activity – especially for startups with lean teams or overseas contractors.

Tighter rules on overseas R&D

You can no longer claim for R&D activities carried out overseas in most cases – including work done by subcontractors or externally provided workers (EPWs) based outside the UK.

This restriction was announced previously, but only comes into effect for accounting periods beginning on or after 1 April 2024.

There are limited exceptions – for example, where it would be wholly unreasonable to carry out the R&D in the UK due to geographic, environmental or legal factors. But in most cases, if the R&D doesn’t happen in the UK, it won’t qualify for relief.

If your company relies on overseas experts or international contractors to deliver part of your R&D, it’s worth reviewing your arrangements now to make sure you understand how this might affect future claims.

New rules for subcontracted R&D

This is one of the biggest changes – and one of the most complex. The new scheme aims to ensure that R&D relief goes to the company that’s actually making the decision to carry out the R&D and taking on the financial risk.

What does this mean in practice?

If you contract another company to carry out R&D for your business, you can still claim for those costs – as long as the R&D fits the usual criteria.

But if your company is being paid to do R&D work on someone else’s behalf, you probably won’t be able to claim under the merged scheme. This is a major shift for companies who previously claimed RDEC in these circumstances.

There are some exceptions – for example, if you’re doing R&D work for a non-taxpaying entity (like a charity, university, or overseas organisation), you may still be able to claim. But for most commercial subcontracted arrangements, the right to claim now sits with the company that initiated the R&D, not the one delivering it.

These changes could have a big impact on businesses in complex R&D supply chains. If you’re not sure how the new rules apply to you, it’s worth reviewing your contracts and talking to a tax adviser to clarify your position.

📘Read the full draft HMRC guidance on contracted out R&D and overseas restrictions

R&D intensive SMEs: do you qualify for enhanced support?

If your company is loss-making and spends heavily on R&D, you may be eligible for a more generous version of the scheme known as the Enhanced R&D Intensive Support (ERIS) scheme.

This is designed to support innovative early-stage businesses – especially those that haven’t yet reached profitability but are investing a significant chunk of their budget into R&D.

What do you get under ERIS?

If you qualify as an R&D intensive SME, you can:

• Deduct an extra 86% of your qualifying R&D costs when calculating your taxable loss (on top of the standard 100% deduction already in your accounts)
• Claim a cash credit worth up to 14.5% of your enhanced R&D losses – and this credit is not taxable

So, in total, you can benefit from a 186% deduction on qualifying R&D spend.

But to get this relief, you need to meet two key conditions:

• You must be an SME and loss-making
• Your R&D spend must be intensive – at least 30% of your total expenditure for accounting periods beginning on or after 1 April 2024 (for accounting periods beginning on or after 1 April 2023, the threshold is 40%)

Who counts as a loss-making SME?

To qualify, your company must:

• Have fewer than 500 staff, and either
  • A turnover under €100 million, or
  • Gross assets under €86 million
• Be loss-making for tax purposes before the additional R&D deduction is applied

If your company is profit-making or doesn’t meet the 30% R&D threshold, you’ll need to claim under the standard merged scheme instead.

What counts as ‘intensive’ R&D?

You meet the intensity condition if your qualifying R&D expenditure is 30% or more of your total expenditure during your accounting period (and that of any connected companies).

Total expenditure includes:

• Costs in your P&L that follow Generally Accepted Accounting Practice (GAAP)
• Pre-trading costs that would qualify for relief under the SME scheme
• Deductions made under s1308 of the Corporation Tax Act (CTA) 2009

It does not include:

• Amortisation that’s added back in your tax computation
• Payments to connected companies (like intra-group transfers)

If you work with connected companies – especially overseas ones – you’ll need to allocate shared costs carefully and consistently. HMRC allows reasonable methods for doing this, such as pro-rata by days or tracking costs as they arise, as long as your approach is justifiable and documented.

What if you dip below the 30% threshold?

There’s a grace period in place. If:

• You qualified as an intensive SME last year, and
• You made a valid R&D claim on expenditure from 1 April 2023 onwards

… then you can still claim under the R&D Intensive Support scheme this year, even if your spend drops slightly below the 30% line.

What if you exceed the PAYE/NIC cap?

Even under the intensive SME scheme, your cash credit is still subject to the PAYE cap – unless you’re exempt.

The cap limits how much you can receive as a cash payout for the current accounting period to:
£20,000 + 300% of your total PAYE and NIC liability

You can read more about how the PAYE cap works in HMRC’s guidance.

Ready to make an R&D claim?

Whether you’re applying for the first time or adjusting to the new rules, our team can help you put together a solid claim that fits your business.

Book a call with us to talk through your next steps – and find out how SeedLegals can support you with your R&D claim.