The Merged RDEC Scheme Explained: What Changed in April 2024?

Why the Schemes Merged

For years, the UK operated two separate R&D tax relief schemes: the SME scheme for smaller companies and the RDEC scheme for larger companies and those receiving grant funding. The complexity of this dual system created confusion, inconsistency, and significant administrative burden for both businesses and HMRC.

The merged RDEC scheme, effective for accounting periods starting on or after 1 April 2024, brings all companies into a single framework. The goal is simplification, though the transition has required businesses and advisers to adapt their claim preparation processes.

For most businesses, the merged scheme operates more like the old RDEC than the old SME scheme. Understanding these structural differences is essential for anyone preparing claims under the new system.

How the Merged Scheme Works

Under the merged scheme, companies calculate their qualifying R&D expenditure and apply an enhancement rate of 86% (subject to change by HMRC). This creates an enhanced expenditure figure that is then treated as a taxable credit.

For profitable companies, this credit reduces Corporation Tax liability. For loss-making companies, the credit can be surrendered for a cash payment. The effective benefit works out at approximately 20% of qualifying expenditure, though the exact calculation depends on the company's tax rate and position.

The scheme applies to all companies regardless of size, removing the old SME/RDEC distinction. However, there are additional complexities for R&D-intensive SMEs, which can qualify for enhanced relief under separate provisions if they spend a high proportion of their total costs on R&D.

Subcontractor Rules Changed

One of the biggest practical changes affects subcontractor costs. Under the old SME scheme, subcontractor costs were generally claimable with few restrictions. Under the merged scheme, subcontractor costs can only be claimed by the company that directed and oversaw the R&D work.

This means if your company commissions R&D work from a subcontractor and directs the technical approach, you can claim the subcontractor costs. But the subcontractor itself generally cannot claim for the same work. This prevents double claiming and clarifies responsibility.

For businesses that rely heavily on subcontractors, this change requires careful review of contracts and working arrangements. It is essential to ensure that your company, not the subcontractor, is the one initiating and directing the R&D activity.

What This Means for Your Next Claim

If your business has claimed under the old SME scheme, your next claim will follow the merged RDEC structure. This may change the value of your claim depending on your profit or loss position, your Corporation Tax rate, and the mix of costs in your expenditure.

R&D-intensive SMEs that spend at least 30% of total expenditure on R&D may qualify for additional enhanced relief. This is designed to protect genuinely R&D-focused small businesses that might have been worse off under the standard merged scheme rates.

The merged scheme also introduced stricter compliance requirements, including mandatory additional information forms and named officer sign-off. Claims submitted without proper supporting information are now much more likely to be rejected or delayed by HMRC.

RD Tax Consultant stays current with all HMRC guidance and legislative changes. We help Manchester businesses navigate the merged scheme confidently, ensuring claims are structured correctly and all new requirements are met.