The New Merged R&D Scheme in Practice: Key Considerations for Early Claimants
As we begin the second quarter of 2025, the first companies with 12-month accounting periods are preparing their latest research and development (R&D) tax relief claims under the new merged R&D Expenditure Credit (RDEC) scheme and the Enhanced R&D Intensive Support (ERIS) scheme. But what are the key considerations early claimants need to be aware of? Dr Mehul Kyprianou-Chavda, R&D Technical Senior Manager, Ryan, explores this in our latest blog post.
Most Small and Medium Enterprises (SMEs) with accounting periods starting on or after 1 April 2024 will be claiming under the merged RDEC scheme. However, if they are loss-making and claiming for more than 30% of their total incurred expenditure as qualifying R&D expenditure, then SMEs would claim under the ERIS scheme.
Whilst many will see a decrease in the amount of tax relief they are entitled to, in comparison to the previous SME scheme, there are several silver linings to the changes. Notably, the changes provide greater consistency, clarity, and in some cases, improved claim potential.
The New Merged R&D Scheme
Whilst we haven’t quite reached HMRC’s goal of a “simplified single scheme” for all claimants, the merged RDEC scheme represents firm progress in this direction. It is modelled on the previous RDEC scheme – an above-the-line taxable credit, which generates a tax credit proportional to the qualifying expenditure of carrying out qualifying projects.
The RDEC scheme has seen significant successive increases in generosity since being introduced in 2013 at 10% and more recently (for expenditure from 1 April 2023) climbing to 20%.
In addition to the latest rate increase, merged RDEC claimants who initiate the R&D may also claim for costs of contracting R&D to a third party, which had historically been more restricted under the old RDEC scheme. However, while the rules have been relaxed so that expenditure on contracted work is no longer limited to qualifying bodies like charities, universities, or research organisations, new restrictions apply. Specifically, costs related to contractors no longer qualify if the R&D activity takes place overseas, unless an exemption applies. Determining whether an exemption applies can be complex and isn’t always straightforward.
Greater Clarity on Contracted R&D
By contrast, one of the most significant aspects of the merged scheme is its simplification and clarification on contracted R&D, determining who has the right to claim where work is carried out for a customer in order to prevent double claims on the same project. Seasoned claimants will be all too familiar with the inadequacy of the previous SME/RDEC schemes in this regard and their respective slow and time-consuming resolution through multiple cases heard at First Tier Tribunal.
Post-tax claims under merged RDEC will generate a tax benefit of up to 16.2% of all qualifying R&D expenditure incurred in executing a qualifying project – note that the guidelines of what constitutes a qualifying project remains the same as in the previous SME and RDEC schemes.
Implications on Former RDEC and SME Claimants
Previous claimants under the RDEC scheme, i.e. large companies, or those with grant funding or subsidised/subcontracted R&D, will continue to enjoy the recent 54% increase in the gross RDEC entitlement (for expenditure after 1 April 2023). However, they will now also benefit from the relaxation of the restrictions on expenditure incurred on contracted R&D to third-party limited companies. This may present a significant increase in the quantum of these companies’ respective claims under the merged RDEC.
Only those SME companies that are both loss-making and claiming for more than 30% (lowered from 40% under the R&D-intensive flavour of the SME scheme) of their total incurred expenditure as qualifying R&D expenditure will be eligible for submission under the ERIS scheme. Whilst this scheme is a targeted relief to provide more generous relief to support innovative companies that invest heavily in R&D, it is possible that companies with lower levels of losses may generate smaller tax benefits through an ERIS submission rather than a claim under the less-selective merged RDEC scheme.
Fortunately, for claimants in the new world of merged RDEC and ERIS, it is possible to opt out of submitting under ERIS and revert to a merged RDEC claim where it is more advantageous for the claimant, unlike the old world of SME and RDEC that did not allow this.
Looking Ahead
As the first claims under the new rules start to take shape, it’s clear that HMRC has taken meaningful steps to simplify what was a notoriously complex system. The merged scheme, with its improved clarity and broader scope for contracted-out R&D and more generous headline rate, is a welcome development. We’re not quite at a single, streamlined regime just yet, but this is a solid step in the right direction. With the right advice, companies should find the new rules not only manageable, but in some cases, more rewarding than before. It’ll be interesting to see how the system beds in over the coming year.
In this evolving landscape, expert advice is more valuable than ever. A knowledgeable adviser can ensure the new rules are applied correctly, identify the most beneficial route, optimise the claim value, and deliver compliant submissions that withstand HMRC scrutiny.
Speak to our expert R&D tax team to ensure your next claim is accurate, optimised, and compliant.