The New R&D Merged Scheme: A 2025 Technical Guide for Growth Companies

What is the New R&D Merged Scheme 2025 all about?

For growth-focused technology companies, the Research & Development (R&D) tax relief landscape has undergone its most significant structural shift in two decades. As of 1 April 2024, the historic separation between the “SME Scheme” and the “Large Company” (RDEC) scheme has largely ended, replaced by a single Merged Scheme.

While the dust settles on the structural changes from April 2024, the Autumn Budget 2025 (November) has introduced further refinements and forward-looking pilots that directly impact how your business plans for cash flow.

This briefing provides a technical dissection of the new regime, the critical “Contracted Out” provisions that threaten supply chain claims, and the “Enhanced” support still available for loss-making innovators. We also integrate the latest confirmation from the Autumn Budget regarding Advance Assurance and administrative reforms.

1. The Core Structural Shift: From Two Schemes to One

Historically, the UK operated a two-tier system: a generous “Super-deduction” style scheme for SMEs (approx. 25-33% benefit) and a taxable “Expenditure Credit” (RDEC) for large companies (approx. 10-15% benefit).

The New Reality (Post-April 2024)

Most companies now claim under a single Merged Scheme modelled on RDEC. Under this Merged Scheme, relief is no longer a reduction in taxable profits (a “super-deduction”). Instead, it is a taxable credit treated as income in your accounts. This improves “Above the Line” profit (EBITDA), which can be beneficial for bank covenants and valuation metrics, even if the net cash benefit is lower than the old SME scheme.

The Rate Calculation

The headline rate for the Merged Scheme is 20%. However, because this credit is taxable, the net benefit depends on your Corporation Tax (CT) rate:

• Profitable Companies (25% Main Rate): 20% credit minus 5% tax paid results in a 15.0% Net Benefit.
• Profitable Companies (19% Small Profits Rate): 20% credit minus 3.8% tax paid results in a 16.2% Net Benefit.
• Loss-Making Companies (19% Notional Tax): 20% credit minus 3.8% notional tax results in a 16.2% Net Benefit.

Impact Analysis: For a profitable SME paying 25% CT, the benefit has fallen from roughly 21.5% (Old SME Scheme) to 15.0% (Merged Scheme). This represents a 30% reduction in value, necessitating a review of R&D budgets and cash flow forecasts.

2. The “Contracted Out” Bombshell

The most technically complex and commercially risky change in the Merged Scheme is the treatment of Contracted Out R&D. Previously, if a Large Company hired an SME, the SME could often claim. Now, the “Decision Maker” principle applies.

The “Intended or Contemplated” Test

HMRC guidance now focuses on who holds the “decision-making power” regarding the R&D. The right to claim sits with the company that initiated and intended the R&D to prevent double-claiming.

For example, if Company A (Customer) hires Company B (Software House) to build a custom AI platform, and the project requires R&D:

• Company A claims the relief (as they initiated the R&D).
• Company B cannot claim, even though they did the technical work.

There are exceptions. If the customer is “ineligible” (e.g., a charity or overseas entity), the right to claim passes down to the subcontractor. Additionally, if the R&D was “uncontemplated”, meaning Company B had to invent a solution internally to fulfill a standard contract, Company B may arguably claim for that specific internal R&D.

3. The Safety Net: Enhanced R&D Intensive Support (ERIS)

For early-stage, cash-burning startups, the Merged Scheme’s 16.2% rate is a severe blow compared to the old 33% cash credit. To mitigate this, the government introduced ERIS.

Eligibility & Benefits

To qualify, you must be a loss-making SME. Crucially, your “Qualifying R&D Expenditure” must be at least 30% of your “Total Relevant Expenditure” (tax-deductible expenses). Note that this threshold was lowered from 40% to 30% for accounting periods starting on or after 1 April 2024.

The benefit is an 86% additional deduction (Total 186%) with a surrender rate of 14.5%, resulting in a Net Cash Benefit of approximately 26.97% of qualifying spend.

4. The Overseas Restriction

Effective April 2024, relief is generally restricted to R&D activity performed in the UK. Externally Provided Workers (EPWs) must be subject to UK PAYE/NIC, and subcontractor activity must be physically performed in the UK.

The “Wholly Unreasonable” Exemption: You can still claim for overseas costs if it is “wholly unreasonable” to replicate the conditions in the UK (e.g., deep ocean testing or arctic conditions). However, cost savings or staff availability are not valid reasons. Companies using offshore dev teams generally lose the ability to include these costs.

5. Autumn Budget 2025: The Forward View

The Autumn Budget 2025 reinforced the government’s commitment to R&D while introducing specific administrative measures.

Targeted Advance Assurance (Spring 2026)

The government confirmed a pilot for a new Targeted R&D Advance Assurance Service launching in Spring 2026. This mechanism will allow SMEs to gain clarity on key aspects of their claims before submission, allowing high-growth firms to “de-risk” their cash flow forecasts.

Intra-Group Payments & Investment Limits

New legislation clarifies that payments made in return for surrendered R&D credits are treated correctly for tax purposes, effective for payments on or after 26 November 2025. Additionally, from April 2026, the lifetime investment limit for VCT and EIS schemes increases to £24m (or £40m for Knowledge Intensive Companies), ensuring funding does not dry up as R&D companies scale.

6. Technical Checklist for Claims (2025/26)

When preparing your next claim, ensure your finance team addresses these five points:

• Scheme Selection: Is your R&D Intensity >30%? If yes, claim ERIS. If no, claim the Merged Scheme.
• Supply Chain Review: Apply the “Intended or Contemplated” test to all contracts where you are the subcontractor.
• Overseas Costs: Strip out non-UK EPWs unless you have a documented environmental necessity.
• PAYE Cap: Remember the PAYE cap still applies to the payable element of the Merged Scheme credit.
• Advance Notification: For new claimants, ensure the Advance Notification Form is submitted within 6 months of the accounting period end.