March 4, 2026

The Impact of the HMRC Merged Scheme

– Written by Freya Riches – Tax Associate.

R&D tax relief in the UK has seen considerable change in recent years, as HMRC seeks to improve support for genuine innovation, whilst improving transparency and administration of the regime. Following consultation with businesses, advisers and industry bodies as part of HMRC’s R&D tax reliefs review, alongside increased compliance activity, HMRC concluded that operating two separate schemes, the Small and Medium-sized Enterprise R&D scheme (SME) and the Research & Development Expenditure Credit (RDEC), added complexity, led to inconsistent outcomes, and increased the risk of error. This view was informed by HMRC’s own compliance analysis, which for 2021-2022 indicated higher levels of non-compliance within SME claims, estimated at around 24.4% of claimed expenditure, compared with approximately 3.6% under the RDEC scheme. As a result, for accounting periods beginning on or after 1 April 2024, these schemes have been superseded by the merged R&D scheme, which applies to companies of all sizes undertaking qualifying UK R&D activity, other than those that meet the criteria for “R&D intensive” SMEs. 

How the Merged Scheme Works

The merged scheme is intended to simplify the system and bring greater consistency to how relief is received and reviewed by HMRC. Under the merged scheme, qualifying R&D expenditure attracts a taxable credit at a headline rate of 20%. This credit is subject to the step 2 corporation tax restriction, meaning that where a company pays corporation tax at the main rate of 25%, the effective post-tax benefit is approximately 15%. Where a company is subject to marginal relief, including where it has small profits or is loss-making, the credit is effectively subject to the lower corporation tax rate of 19%, increasing the effective benefit of approximately 16.2%. For many smaller businesses, this represents a reduction in tax relief compared to the previous SME scheme (which typically delivered an effective benefit ranging from approximately 8.5% to 27% for loss–making SMEs surrendering losses for a payable credit). By contrast, for larger companies, the level of relief under the merged scheme is broadly comparable to the previous RDEC scheme. 

Practical Impact on Businesses

In practice, the merged scheme changes how businesses experience R&D tax relief. Whilst some early-stage or loss-making companies may see a lower level of tax relief compared to the previous SME scheme, loss-making businesses that qualify as R&D–intensive can continue to access enhanced relief through the Enhanced R&D Intensive Scheme (ERIS). This scheme provides a higher level of tax relief where R&D expenditure makes up at least 30% of the company’s total expenditure, and where applicable, connected company expenditure. 

Changes to Eligible Costs

There have also been important changes to the costs that can be claimed. One of the most significant is the restriction on overseas externally provided workers and contractor costs. In most cases, expenditure relating to overseas R&D activity is no longer eligible unless specific conditions are met. To be deemed qualifying in accordance with HMRC’s Corporate Intangibles Research and Development (CIRD), specifically CIRD84250 to CIRD84260, this includes circumstances where it would be considered wholly unreasonable to carry out the work in the UK due to geographical, environmental or regulatory factors that are not present domestically. This is already influencing decisions around where R&D activity is undertaken and how projects are structured. 

Interaction with Grant Funding

The interaction between R&D tax relief and grant funding has become more straightforward. Under the previous SME scheme notified state aid was not allowable under the scheme and required a claimant to submit the specific projects and the associated expenditure through the RDEC scheme. However, under the merged scheme, SMEs can qualify grant funded / notified state aid projects, without ring–fencing the expenditure or qualifying under a different scheme. 

Why This Matters

Overall, the merged scheme seeks to provide greater consistency and clarity, but may result in reduced relief for SMEs. The changes reflect HMRC’s broader focus on consistency of outcomes and improved compliance across the system. 

How We Can Help

If you’d like to arrange a meeting to discuss the merged scheme or explore any of the other funding support services Streets offers, please use the link below to book a time that suits you.