The Merged R&D Scheme Explained: What Every UK Business Needs to Know in 2026

If your accounting period started on or after 1 April 2024, the old rules are gone. The separate SME and RDEC schemes have been replaced by a single merged R&D expenditure credit scheme under CTA 2009 Part 13 Chapter 6A. Whether you're a £2m turnover software company or a £200m manufacturer, you're now on the same scheme.

Here's what that actually means for your next claim.

What Changed and When

The merged scheme applies to accounting periods beginning on or after 1 April 2024.

• If your year end is 29 Feb 2024 , your first claim under the new rules covers the period beginning 01 March 2025.
• If your year end is 31 December, it's the period ending 31 December 2025.

There is no split-period treatment. If your accounting period straddles 1 April 2024 but started before it, you stay on the old rules for the entire period.

The Single 20% Credit Rate

Every company now receives a 20% above-the-line expenditure credit on qualifying R&D spend.

Because this credit is taxable, the net benefit works out at approximately:

• 15% net for profit-making companies paying corporation tax at 25%
• 16.2% net for loss-making companies

Compared to the old schemes:

• Former SME scheme claimants (effective rate up to 21.5%) see a reduction.
• Former RDEC claimants (old rate 13%) see an increase.

In other words:

• If you were an SME on the old SME scheme, your R&D tax benefit has dropped by roughly a quarter.
• If you were a large company on old RDEC, you're better off.

The ERIS Exception (Enhanced R&D Intensive Support)

There is one important carve-out for certain loss-making SMEs.

If your company is loss-making and an SME, and your qualifying R&D expenditure is at least 30% of your total expenditure, you may qualify for Enhanced R&D Intensive Support (ERIS) instead of the merged scheme.

Under ERIS:

• You get an extra 86% deduction on qualifying R&D spend (on top of the 100% already in your accounts).
• You can claim a payable tax credit of up to 14.5% of the surrenderable loss.
• This payable credit is not liable to tax.

Key points:

• The R&D intensity threshold fell from 40% to 30% for accounting periods beginning on or after 1 April 2024.
• There is a one-year grace period: if you temporarily fall below the 30% threshold, you do not immediately lose ERIS eligibility.

This makes ERIS particularly valuable for early-stage, R&D-heavy tech, life sciences, and deep-tech businesses that are still loss-making.

Overseas Costs: The Big Restriction

From accounting periods beginning on or after 1 April 2024, expenditure on overseas subcontractors and externally provided workers (EPWs) based outside the UK generally no longer qualifies for R&D relief.

The key test is where the R&D activities are physically carried out, not:

• Where the company is registered
• Where the individual is resident
• Where the invoice is raised

Example:

• Your subcontractor is a UK company, but they send their team to work from an office in Lisbon.
• The R&D work is physically done in Portugal.
• Those costs do not qualify under the new rules.

There are limited exceptions where it would be unreasonable for the work to be done in the UK (for example, specific environmental conditions or regulatory requirements). HMRC’s guidance at CIRD150000 sets out the detailed conditions.

For many businesses that historically relied on overseas development teams or specialist foreign labs, this is likely to be one of the most painful changes.

Subcontracted R&D: Who Can Actually Claim?

The merged scheme is designed to focus relief on the company that:

• Decides to undertake the R&D, and
• Bears the financial risk of that R&D.

This is a fundamental shift from the old RDEC rules.

Under the old RDEC:

• SMEs subcontracted to perform R&D for a larger company could often claim RDEC on that work.

Under the merged scheme:

• If R&D has been contracted to you by another company, you will generally not be able to claim.
• Instead, the company that commissions and funds the R&D (the principal) is usually the one that can claim.

The 65% Rule

Where R&D work is contracted out to an unconnected third party:

• The principal can usually claim 65% of the payment as qualifying R&D expenditure.

Where R&D is contracted to a connected party:

• The principal can generally claim 100% of the relevant R&D cost (subject to the detailed rules).

This makes it crucial to understand who is the principal in any R&D arrangement and how your contracts are structured.

What You Need to Do Now

To prepare for your first claim under the merged scheme, you should:

1. Check your accounting period start date

• If it begins on or after 1 April 2024, you are on the merged scheme (or ERIS if eligible).

1. Review your supply chain and contracts

• Identify who makes the R&D decisions and who bears the financial risk.
• Confirm whether you are the principal or a subcontractor.
• Adjust contracts where necessary to reflect commercial reality and support your claim position.

1. Audit overseas costs

• List all subcontractor and EPW costs.
• Identify where the work is physically performed.
• Remove non-UK R&D activity from your qualifying expenditure unless a specific exception clearly applies.

1. Model the financial impact

• Compare your old SME/RDEC benefit to the new 20% credit (or ERIS if applicable).
• Consider the impact of an above-the-line credit on EBITDA, KPIs, and investor reporting.
• Factor in the loss of relief on overseas R&D and subcontracted work.

1. Tighten your documentation

• HMRC’s Additional Information Form (AIF) requirements still apply.
• Make sure you can evidence:
• Which projects qualify as R&D.
• Who initiated and controlled the R&D.
• How costs are linked to qualifying activities.
• Keep clear records of decision-making, technical uncertainties, and project ownership.

Navigating the Transition

The merged scheme is intended to simplify the UK’s R&D relief landscape. In practice, the transition period is creating complexity, especially around:

• Subcontracted R&D and who is entitled to claim
• Overseas R&D costs and which activities still qualify
• R&D-intensive SMEs deciding whether they qualify for ERIS

If you are unsure how the new rules affect your claim, it is important to get specialist advice before filing. Errors can lead to delays, enquiries, or repayments later.

Innovation Plus are R&D tax credit specialists with deep experience of the merged scheme, HMRC compliance, and CT600 preparation. Contact us for a free assessment of your eligibility and to model the impact of the new rules on your next claim.