R&D tax relief merger – is your company ready?

The two previous R&D tax relief schemes—the small or medium-sized enterprise (SME) scheme and the R&D expenditure credit (RDEC) scheme—have officially merged for accounting periods beginning on or after 1 April 2024.

The new unified scheme follows the RDEC model, where the credit is treated as taxable income. While intended to simplify the system, the transition requires careful review of how claims are calculated and reported to HMRC.

How the new scheme works

Under the merged scheme, companies claim a taxable credit at a rate of 20% of their qualifying R&D expenditure. Because the credit is taxable, the net benefit to the company is lower—typically around 15% to 16.2%, depending on the company's corporation tax rate. This represents a reduction in generosity for many SMEs compared to the old regime.

Subcontracting and PAYE caps

The rules around subcontracted R&D have been overhauled. In general, the company deciding to undertake the R&D (the 'customer') is the one entitled to claim the relief, rather than the subcontractor doing the work. Additionally, the PAYE/NIC cap, which limits the amount of payable credit a company can receive based on its payroll taxes, has been retained and applies to all companies under the new scheme.

R&D intensive SMEs

A separate, more generous scheme remains in place for 'R&D intensive' SMEs. To qualify, a company's qualifying R&D expenditure must make up at least 30% of its total total expenditure. These companies can claim a payable cash credit at a rate of 14.5%, providing a vital lifeline for loss-making startups heavily invested in innovation.