Why HMRC Merged the Schemes
The decision to merge the SME R&D Relief scheme and the Research and Development Expenditure Credit (RDEC) into a single scheme was announced at the Autumn Statement in November 2022 and took effect for accounting periods beginning on or after 1 April 2024.
HMRC's stated rationale was threefold. First, complexity. The two-scheme system had become difficult to navigate, particularly for companies that moved between SME and large company status, or that received Innovate UK grants which triggered the old "contamination" rules. Second, compliance. The SME scheme's higher rates had attracted a significant volume of non-compliant claims, and the merged scheme was part of a broader package of fraud prevention measures. Third, policy alignment. The government wanted a simpler system that was easier to administer and audit.
The merger does not represent a withdrawal of support for R&D. The credit rate under the merged scheme is 20%, the same as the final RDEC rate. The intention was simplification, not reduction, though for some SME claimants the practical effect has been a change in net benefit.
The Old System: SME Scheme vs RDEC
Understanding the change requires a baseline understanding of what existed before April 2024.
| Criterion | Old SME Scheme | Old RDEC | New Merged Scheme |
|---|---|---|---|
| Who it applied to | Companies with <500 employees, ≤€100M turnover or ≤€86M balance sheet | Large companies; SMEs receiving notified state aid for the project | All companies (except ERIS-eligible loss-makers) |
| Mechanism | Enhanced deduction (130% additional deduction on qualifying spend) | Above-the-line credit | Above-the-line credit |
| Credit / deduction rate | 130% additional deduction (before October 2023 changes) | 20% credit (from April 2023) | 20% credit |
| Net benefit (profitable, 25% CT) | Approx. 21.5p per £1 | Approx. 15p per £1 | Approx. 15p per £1 |
| Overseas subcontractors | Claimable | Not claimable (narrow exception only) | Not claimable (narrow exception only) |
| Subcontractor cap | No cap for SMEs | 65% of payments to unconnected parties | 65% of payments to unconnected parties |
The New Merged Scheme: Key Parameters
The merged scheme operates via the above-the-line credit mechanism that was previously used by large companies under RDEC. The key parameters are as follows.
Credit rate: 20%. The credit is calculated as 20% of qualifying R&D expenditure for the period.
Above the line. The credit appears in the company's profit and loss account as income before tax. This is different from the old SME enhanced deduction, which reduced taxable profits. The above-the-line presentation means the credit improves reported EBITDA, which has implications for how investors and lenders read the accounts.
Corporation tax treatment. Because the credit appears as income, it is subject to corporation tax. For a profitable company paying corporation tax at 25%, the net benefit after tax is 20% minus 5% (25% of 20%) = 15% of qualifying expenditure. In plain terms, 15p per £1 of qualifying spend.
Payable element for loss-making companies. Where the credit exceeds the company's corporation tax liability, the excess can in many cases be paid out as cash from HMRC, subject to the PAYE cap and the statutory step-down mechanism. This makes the relief accessible to companies with no tax liability.
What Changed for Profitable SMEs
For profitable SMEs previously claiming under the old SME scheme, the net benefit comparison requires care. The old SME scheme (before the October 2023 rate reductions) provided an enhanced deduction, which at the 25% corporation tax rate produced approximately 21.5p per £1 of qualifying expenditure. The merged scheme produces approximately 15p per £1.
The reduction is real but partial. The merged scheme rate is materially lower than the old SME scheme's peak rates. However, some of the gap is offset by the above-the-line nature of the credit, which improves reported profit and can have secondary benefits in terms of financial covenants and investor metrics.
For most profitable SMEs, the merged scheme represents a modest reduction in net benefit compared to the old SME scheme, but the claim process and eligibility criteria remain broadly the same. A specialist adviser will calculate the revised claim value under current rules.
What Changed for Loss-Making SMEs
The old loss-making SME payable credit was one of the most valuable features of the UK R&D tax credit system for early-stage companies. The merger has changed this significantly. Loss-making SMEs now follow the same above-the-line mechanism as profitable companies, with the excess credit potentially paid out as cash rather than having a dedicated high-rate payable credit as previously available under the SME scheme.
The introduction of ERIS was designed to partially compensate for this loss, by providing an enhanced rate for the most R&D-intensive loss-making companies. Whether ERIS provides equivalent benefit depends on whether the company meets the 30% intensity threshold.
The ERIS Scheme: Who Qualifies
The Enhanced R&D Intensive Support scheme was introduced alongside the merged scheme as a higher-rate option for the most R&D-intensive loss-making companies. It is not part of the merged scheme; it operates in parallel for qualifying companies.
ERIS applies where two conditions are met: the company is loss-making in the accounting period, and qualifying R&D expenditure represents at least 30% of total expenditure for the period. Companies that meet both conditions claim at a 27% credit rate rather than 20%.
Worked Example: ERIS Eligibility
A biotechnology company has total expenditure of £2,000,000 for the year to 31 March 2026. Of this, £700,000 is qualifying R&D expenditure (staff costs, consumables, and subcontractor work performed in the UK). The company is loss-making.
R&D intensity: £700,000 / £2,000,000 = 35%. This exceeds the 30% ERIS threshold.
Under ERIS, the credit is: £700,000 x 27% = £189,000. Where the company has no corporation tax liability, a substantial portion of this amount may be receivable as a cash payment from HMRC (subject to the PAYE cap and statutory adjustments).
Under the standard merged scheme (20%), the credit would have been £140,000 instead of £189,000. ERIS is worth an additional £49,000 for this company in this period.
The intensity threshold is assessed separately for each accounting period. A company that qualifies in one period does not automatically qualify in the next, and changes in headcount, expenditure mix, or activity scope can move a company in or out of ERIS eligibility from year to year.
Overseas Subcontractors: A Major Change
For companies that have historically used offshore development teams, this change requires a reassessment of their qualifying expenditure. Staff on UK payroll, UK-based contractors, and consumables used in the UK remain claimable. Payments to overseas subcontractors that do not fall within the narrow statutory exception do not.
This change has a material effect on the claim quantum for companies with significant offshore spend. A specialist adviser should review the position carefully, particularly for software and technology businesses that routinely use overseas development partners.
The Additional Information Form
Mandatory since 1 August 2023, the Additional Information Form (AIF) must be submitted to HMRC before or alongside the amended corporation tax return for any R&D claim. This requirement predates the merged scheme but is part of the same compliance reform package.
The AIF requires project descriptions for qualifying activities, a cost summary broken down by category, the name of a responsible officer at the company, and details of any adviser involved in preparing the claim. Claims submitted without a completed AIF are rejected by HMRC.
For a detailed explanation of the AIF and how to complete it correctly, see our separate guide: The HMRC Additional Information Form for R&D Tax Credits.
Companies Still on Old Periods
Companies with accounting years that straddle 1 April 2024 face a split calculation. Expenditure incurred before 1 April 2024 is assessed under the rules that applied in that part of the period (SME scheme or RDEC depending on the company's circumstances). Expenditure from 1 April 2024 is assessed under the merged scheme.
For a company with a 31 December year-end, the period to 31 December 2024 straddles April 2024. The January to March 2024 portion (3 months) is assessed under the old rules; the April to December 2024 portion (9 months) is assessed under the merged scheme. The split applies to expenditure, not simply to time, so an accurate month-by-month cost schedule is required.
Companies that have not yet submitted claims for periods ending in 2023 or early 2024 should also check whether those periods are still within the two-year filing window. The merged scheme does not affect the deadline rules. For more on this, see: The R&D Tax Credit Deadline: What Every Finance Director Needs to Know.
Frequently Asked Questions
Yes. For accounting periods beginning on or after 1 April 2024, all SME claimants move to the merged scheme. The calculation changes from an enhanced deduction to an above-the-line credit. Companies with periods straddling April 2024 have a split calculation, with part assessed under the old rules and part under the new merged scheme.
ERIS (Enhanced R&D Intensive Support) applies to loss-making companies where qualifying R&D expenditure represents at least 30% of total expenditure. These companies claim a 27% credit rate rather than the standard 20%, and can receive a higher cash payment from HMRC. The intensity threshold is assessed per accounting period. A specialist will calculate whether you qualify each year.
The net benefit under the merged scheme is approximately 15p per £1 of qualifying spend at the 25% corporation tax rate. Under the old SME scheme at peak rates, the equivalent figure was approximately 21.5p per £1. The merged scheme represents a modest reduction for most profitable SMEs. The above-the-line nature of the credit has accounting presentation benefits that partially offset this, but the cash value is lower for most profitable SMEs.
Overseas subcontractor costs are no longer claimable under the merged scheme except in narrow circumstances where the work could not feasibly be carried out in the UK for non-cost reasons. This is a material change for companies with offshore development teams. A specialist should review what remains claimable in your specific situation.
For straddling periods, the period is split at 1 April 2024. Expenditure before that date is assessed under the old rules; expenditure from 1 April 2024 is assessed under the merged scheme. The split applies to actual expenditure, not simply to time elapsed, so a month-by-month cost schedule is required. A specialist adviser will handle the apportionment correctly.
Understand Your Position Under the Current Rules
The merged scheme changed the calculation for every company. Our free assessment establishes what your claim looks like under current rules, whether you have claimed before or are assessing the position for the first time.
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