HMRC is introducing a new Merged R&D tax relief scheme for accounting periods starting from 1 April 2024, consolidating the previous RDEC and SME schemes into a single framework. This unified approach aims to simplify expenditure rules for all R&D tax relief claimants.
To support small, R&D-intensive businesses, HMRC has additionally launched the ERIS (Enhanced R&D Intensive Support) scheme, effective for expenditure incurred from 1 April 2023. Companies with March 2025 year-ends will be some of the first to experience these changes, with all claimants eventually transitioning to either the Merged scheme or ERIS, depending on their eligibility.
Key changes
Rates: The new Merged scheme introduces a uniform 20% above-the-line relief rate applicable to all companies, replacing the previous separate RDEC and SME schemes.
Eligibility: Companies will default to the Merged scheme. Loss-making SMEs can opt for the ERIS scheme if their R&D expenditure represents at least 30% of total expenditure.
Loss-making SMEs can opt for the ERIS scheme if their R&D expenditure represents at least 30% of total expenditure.
PAYE cap: The PAYE cap remains £20,000 plus 300% of a company's PAYE and NIC liabilities. This retains the more generous SME cap rules and includes exemption conditions related to IP creation and subcontractor costs.
Qualifying costs: The qualifying cost categories remain largely consistent, now expanding to include contractor and subcontractor expenses. Traditional categories like staffing, consumables, EPWs, and software continue to be eligible.
The PAYE cap remains £20,000 plus 300% of a company's PAYE and NIC liabilities.
Overseas restrictions: Overseas subcontractor and EPW expenditure will generally be disallowed. The scheme prioritises UK-based R&D activity, with exemptions permitted for specific non-cost-related conditions that prevent UK-based research.
Contracted R&D: Claimants can claim R&D contracted to them, with claim eligibility determined by the party initiating the research. Factors such as contract terms, financial risk, and intellectual property ownership will be considered. Exemptions exist for certain clients like charities, universities, and specific overseas entities.
Our R&D specialists' thoughts
"Companies with March 2025 year-ends will be some of the first to experience these changes, with all claimants eventually transitioning to either the Merged scheme or ERIS, depending on their eligibility."
Impact to claimants
- Reduced tax relief for non-intensive SMEs Companies previously benefiting from higher SME scheme rates will see reduced tax relief under the Merged Scheme, and therefore, would benefit from assessing the potential financial impact.
- Overseas cost restrictions Organisations relying on international staff and contractors will face significant challenges due to restrictions on overseas costs. Businesses with substantial offshore R&D operations should consider the impact this will likely have on their claim.
- Contracted-out R&D compliance The new rules require claimants to carefully review contractual agreements, decision-making processes, and project initiation details to ensure they are the eligible R&D claimants.
- Overall impact and compliance The Merged Scheme will affect a large number of both existing and new claimants. Given HMRC’s heightened scrutiny in recent times, businesses must ensure their R&D claims are robust, well-documented, and fully compliant with the new regulations.
How MHA can help you?
Ensure your business is prepared for the new R&D tax relief changes, review your eligibility, assess financial impacts, and stay compliant. Get in touch with Jay Desai today to discuss how these changes affect your claims and optimise your R&D tax strategy.
