From 1 April 2024, the government introduced a single merged scheme for R&D tax relief, replacing both the SME scheme (except for ERIS) and the previous RDEC regime. THe first standard year long period of account this would apply to would be a 31st March 2025 year end. So it is relevant now. This unified approach simplifies access but introduces some important adjustments to the way the R&D Expenditure Credit (RDEC) is calculated and claimed. This is generally known as the merged scheme or merged RDEC.
If you are used to the old RDEC rules, or if you are entirely new to this area, here is what you need to know about how the new RDEC works under the merged scheme.
The Basics: What Is the New RDEC?
The new RDEC is a taxable credit equal to 20 percent of qualifying R&D expenditure . That credit is included in taxable profits, just like before. What happens next, however, is governed by a structured series of steps that determine whether the company gets a net tax benefit or an actual cash payment.
These rules are set out in the Corporation Tax Act 2009, Part 13 Chapter 1A (sections 1042A to 1042O), and are explained in the HMRC Corporate Intangibles Research and Development Manual (CIRD112100).
Key Changes from the Old RDEC Scheme
Although the broad concept of RDEC remains familiar, some significant changes were introduced:
Unified Eligibility: Companies of any size can now claim under the new RDEC. There is no longer a size-based divide between SME and large companies (though ERIS remains available for certain loss-making, R&D-intensive SMEs – more on that in a future blog).
Broader Qualifying Expenditure: Companies can now claim for R&D they have contracted out, which was previously not permitted under old RDEC. This aligns with the previous SME rules but subject to new definitions and limitations (e.g. 65 percent cap on unconnected contractors remains).
Revised Step Process: The seven-step process used to calculate the final benefit remains in place, but it has been refined:
The seven-step process used to determine the final benefit under the new RDEC scheme remains in place, but with some important refinements. Each step determines how much of the credit is used to offset tax or results in a cash payment:
Step 1 – Offset against corporation tax for the period
The gross RDEC is first used to reduce the company’s corporation tax liability for the current accounting period.
Step 2 – Notional tax deduction
If there is any remaining credit, a notional tax charge is applied to simulate the tax that would have been paid had the credit been included in taxable profits. This is calculated at the applicable corporation tax rate, and the deduction may be lower for small profit-makers and loss-makers. This is carried forward.
Step 3 – PAYE/NIC cap
The remaining amount is then tested against the PAYE and NIC cap: £20,000 plus 300% of the company’s PAYE/NIC liabilities for the year. Any excess is carried forward to the next period.
Step 4 – Offset against corporation tax for other periods
Amounts left after applying the cap may be used to offset corporation tax liabilities of earlier or later accounting periods.
Step 5 – Group surrender
The company can surrender any remaining credit to other group companies to offset their corporation tax liabilities.
Step 6 – Offset against other HMRC liabilities
The credit can then be used to pay off any other tax or duty liabilities owed to HMRC, such as VAT or PAYE arrears.
Step 7 – Cash payment
If any credit still remains after all previous steps, it is paid to the company as a cash sum, subject to conditions including going concern status and compliance with tax obligations.
This structured approach ensures that the RDEC is first used to reduce current and future tax liabilities before any cash payment is made. Notably, changes at steps 2 and 3 under the merged scheme are designed to improve the benefit for smaller or loss-making companies.
A Brief Illustration
Suppose a company incurs £500,000 of qualifying R&D costs. Under the new RDEC:
The gross credit is £100,000 (20% of £500,000).
This amount is treated as income in the profit and loss account.
The notional tax (e.g. at 25%) is £25,000, leaving £75,000 potentially available.
If the company has limited PAYE/NIC liabilities (say, £10,000), then the maximum payable credit in the year may be restricted to £50,000 (i.e. £20,000 + 3 × £10,000).
Any balance can be carried forward for future offset, or surrendered to group companies under steps 4–6.
What Has Not Changed?
The categories of qualifying expenditure are broadly consistent with previous RDEC and SME rules. These include:
-Staffing costs
-EPWs (externally provided workers)
-Contracted out R&D (Of any type of entity in the UK it was restricted under RDEC to individuals, groups of individuals, and approved bodies)
-Software, data, cloud computing services
-Consumables
-Clinical trial volunteers
The key restrictions on subcontracted R&D and foreign R&D also remain, with limitations on claims where the work or costs fall outside the UK unless an exemption applies. A company cannot claim R&D relief if they contracted out with a limited exception if the contracting out company is irrelivable as defined in the law.
A Word on ERIS
You may have heard of ERIS – the Enhanced R&D Intensive Support scheme. This is not part of the merged scheme, but a parallel provision for loss-making, R&D-intensive SMEs. It allows a claim for a payable tax credit at a higher rate (14.5 percent), but is only available in limited circumstances. We will cover ERIS in more detail in our next blog.
Conclusion.
If you advise companies on R&D claims or prepare computations, understanding the new RDEC calculation is now essential. The changes simplify eligibility but also require precision in applying the payment steps and managing PAYE cap restrictions.
Need help preparing an R&D claim under the new rules? We provide specialist advice and compliance support. We offer free CPD workshops to accountants either online or in person. These are a great way to learn about the raft of recent changes to the R&D scheme.
Christopher Toms MA MAAT
Compliance Director
RandDTax