What is the merged R&D expenditure credit scheme?

Why “merged”, and what it replaced

Before the reform there were two reliefs. Small and medium enterprises took an enhanced deduction against profits and, if loss-making, surrendered losses for a cash credit. Large companies, and SMEs whose work was subcontracted to them or subsidised, took the R&D expenditure credit — a taxable credit shown above the line in the accounts.

The merged scheme takes the RDEC mechanism and applies it to everybody. Your company size no longer selects the relief. It still matters — the SME definition decides whether you can claim ERIS instead, and it feeds several of the detailed rules — but the default route is the same for a two-person software company and a listed manufacturer.

The legislation sits in a new Chapter 1A of Part 13 of the Corporation Tax Act 2009, inserted by the Finance Act 2024. It is a new relief, not an amended one, which is why the transitional rules matter so much in the first two years.

When it starts for your company

The merged scheme applies to accounting periods beginning on or after 1 April 2024. Not to expenditure incurred on or after that date.

If your year end is 31 March, your first merged scheme period is the year to 31 March 2025. If your year end is 31 December, your first merged scheme period is the year to 31 December 2025, and the whole of the year to 31 December 2024 is claimed under the legacy rules even though nine months of it fell after 1 April 2024.

This is different from the rate changes of 1 April 2023, which were driven by the date expenditure was incurred and did split accounting periods. The two commencement styles sitting a year apart is the single most common source of error in claims covering 2023 to 2025. The rate and threshold timeline sets out which date governs which figure.

How the credit works

The credit is calculated as 20% of your qualifying R&D expenditure for the period, and 49% for ring-fence oil and gas trades.

It is brought into account as trading income — either in the accounts or in the tax computation — so it increases your taxable profit before it does anything else. This is what people mean by describing it as “above the line”: the credit appears in the profit and loss account as income rather than as a reduction in the tax charge, which is visible to anyone reading the accounts, including investors and lenders.

Because it is taxable, the 20% headline is not what you keep. The scheme then applies a sequence of steps that decides how much of the credit discharges tax, how much can be paid to you in cash, and how much is deferred.

The payment steps

There are seven, and they run in order. Each step deals with what is left after the one before.

Step 1 — your corporation tax for the period. The credit first discharges the corporation tax liability of the accounting period the claim relates to.

Step 2 — notional tax. Anything remaining is reduced to a net-of-tax amount. The rate used depends on the claimant: the main rate for a company charged at the main rate or in marginal relief, and the small profits rate for everyone else, including loss-makers. This is the step that makes a 20% credit worth 15% to a main-rate payer and 16.2% to a loss-maker.

The amount withheld here is not lost. It is carried forward and can be set against corporation tax of a later accounting period, or surrendered to another company in the group.

Step 3 — the PAYE and NIC cap. The amount that can go further is capped at £20,000 plus 300% of your relevant PAYE and NIC liabilities for the period. Anything above the cap is carried forward to the next accounting period as an expenditure credit — under the merged scheme it is deferred, not forfeited.

Steps 4 to 6 — other liabilities and group surrender. What survives step 3 is applied against corporation tax of other accounting periods, may be surrendered to group companies, and is then set against any other liabilities you owe HMRC.

Step 7 — payment. Whatever is left is paid to you, provided the company is a going concern, and subject to HMRC’s ability to withhold payment while an enquiry is open or where PAYE and VAT returns are outstanding.

The PAYE cap exemption

You are outside the step 3 cap entirely if you meet both of two conditions:

• Condition A — your company is creating, preparing to create, or actively managing intellectual property, and that work is done mainly by your own employees. Directors who are not employees do not count towards this.
• Condition B — your qualifying expenditure on connected-company subcontractors and connected-company externally provided workers is no more than 15% of your total qualifying R&D expenditure.

Condition B is the one that catches groups. A company that does its R&D through a connected service company will often fail it without anyone having considered the point until the cap bites.

What else changed, beyond the rate

The merged scheme is not the old RDEC with a new number on it. Four changes matter more than the rate to most claimants.

Contracted-out R&D. Under the merged scheme, the company that decides to do the R&D and bears the risk of it generally claims — so if you contract R&D out, you claim for what you pay your contractor, and your contractor cannot claim for the same work. This replaces both the old SME subcontracting rules and the old large-company position, and it is the most disputed area of the reform. Transitional rules deal with the case where you and your contractor have accounting periods on opposite sides of 1 April 2024, so that the same R&D is not relieved twice or missed altogether.

Overseas expenditure. Payments to contractors and for externally provided workers are restricted to work done in the UK, with narrow exceptions. Overseas R&D that would have been claimable in a period beginning before 1 April 2024 often is not claimable in the period that follows it.

Subsidised expenditure. The old rule that reduced an SME’s claim where the expenditure was met by a grant or another party is gone. Grant funding no longer pushes a claim out of the SME scheme and into RDEC, because there is one scheme.

Contributions to independent R&D. Payments to universities and similar bodies for independent research can no longer be claimed.

Position for accounting periods beginning before 1 April 2024

Legacy rules apply in full to those periods and are still live for amendments, late claims within the two-year window and open enquiries. An SME claimed an enhanced deduction of 130% for expenditure incurred before 1 April 2023 and 86% for expenditure on or after it, with a payable credit where loss-making; a large company, or an SME with subsidised or subcontracted work, claimed RDEC at the rate for the date the expenditure was incurred. The rates and the dates that select them are in the rate and threshold timeline.