What is the merged R&D tax relief scheme and how does it differ from the old separate SME and RDEC schemes?

Full answer

The UK R&D tax relief system was significantly simplified from April 2024, merging what had previously been two quite different schemes into one main scheme, while preserving extra support specifically for the most R&D-intensive loss-making companies. **The old two-scheme system (before April 2024)** Previously, smaller companies (SMEs, based on headcount and financial size thresholds) claimed relief under a generous SME scheme (allowing a substantial additional deduction against taxable profits, or a payable cash credit for loss-making companies), while larger companies used the separate Research and Development Expenditure Credit (RDEC) scheme, which provided a smaller, above-the-line taxable credit rather than an enhanced deduction. **The merged scheme from April 2024** Most companies, regardless of size, now claim under a single merged scheme modelled broadly on the previous RDEC mechanics -- an above-the-line taxable credit currently set at 20% of qualifying R&D expenditure, recognised in the company's accounts as taxable income before being taxed at the company's normal Corporation Tax rate, producing a net benefit after tax. **The separate R&D-intensive SME scheme for loss-makers** A more generous, separate scheme remains available specifically for loss-making SMEs that are "R&D intensive" -- broadly, where qualifying R&D expenditure represents a high proportion (a specified percentage) of the company's total expenditure -- giving these companies access to a higher rate of relief than the standard merged scheme, recognising that many genuinely R&D-intensive early-stage companies (such as biotech or deep-tech startups) are loss-making for extended periods and need stronger support to keep innovating. **Why the change was made** The merger was partly driven by a desire to simplify a system that had become complex to navigate (with companies sometimes uncertain which scheme applied, or inadvertently claiming under the wrong one), and partly to address significant, well-publicised levels of error and fraud that had built up within the previous, more generous SME scheme. **What counts as qualifying R&D expenditure** Regardless of which specific scheme/rate applies, the underlying definition of qualifying R&D activity remains broadly consistent -- work that seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty, not routine testing, cosmetic changes, or the mere application of existing readily deducible knowledge. Qualifying costs typically include staff costs, subcontracted R&D costs (subject to specific new restrictions on overseas subcontracting introduced alongside the merged scheme), software, consumables, and a proportion of utility costs directly attributable to the R&D activity. **Overseas restriction** Alongside the merged scheme, new restrictions generally limit relief for R&D activity subcontracted or carried out overseas, with relief now largely restricted to UK-based R&D activity (subject to narrow exceptions where specific factors, such as unavailability of necessary conditions in the UK, genuinely require overseas work) -- a significant change for companies that previously outsourced substantial R&D work abroad. **Worked example** A profitable manufacturing company spends £400,000 on qualifying R&D activity developing a new production process. Under the merged scheme, they claim a 20% above-the-line credit (£80,000), which is included as taxable income in their accounts and then taxed at the company's Corporation Tax rate, producing a net cash benefit after tax lower than the full £80,000 headline figure but still a substantial and straightforward-to-calculate benefit compared with the previous, more complex dual-scheme system. **Practical tip** Companies should check whether they might qualify for the more generous R&D-intensive loss-making SME scheme rather than assuming the standard merged scheme automatically applies, since the intensity threshold test can make a significant difference to loss-making, high-R&D-spend early-stage businesses in particular.

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