UK Merged R&D Tax Relief Scheme Guide 2026
Comprehensive 2026 guide to the UK merged R&D expenditure credit: the 20% taxable RDEC, contracted-out R&D decision rules, overseas expenditure restrictions, PAYE/NIC cap, claim notification, mandatory Additional Information Form (AIF), payment mechanics and ERIS interaction.
Executive Summary: The Single Merged Scheme
For accounting periods beginning on or after 1 April 2024, the old SME R&D scheme and the old RDEC scheme were replaced by the merged R&D Expenditure Credit (RDEC) scheme. The merged scheme provides a 20% taxable expenditure credit on qualifying R&D expenditure and uses the RDEC payment mechanism. Eligible loss-making R&D-intensive SMEs can instead claim Enhanced R&D Intensive Support (ERIS), subject to its separate statutory conditions.
Rules Comparison: Merged Scheme vs Legacy SME Scheme
The table below compares the merged 2026 scheme against the legacy SME framework:
| Feature | Legacy SME Scheme | Merged R&D Scheme (2026) |
|---|---|---|
| Tax Mechanism | Additional deduction against taxable profits plus a separate payable-credit mechanism for qualifying loss-making SMEs | 20% taxable R&D expenditure credit (RDEC) |
| Net Cash Value for Loss Makers | 14.5% payable credit applied to surrenderable loss under the old SME rules for the relevant historical periods | 20% gross RDEC; the actual post-tax/payment outcome depends on the RDEC payment steps and the company’s Corporation Tax/notional tax position |
| Subcontracted Work | Historic SME contracted-out rules generally allowed specified subcontractor expenditure subject to the old 65% rule | The company that decides to undertake or initiate the R&D generally claims qualifying contracted-out R&D, subject to the merged scheme contract/intention rules and exclusions |
| Overseas Costs | Historically, qualifying overseas expenditure was generally more widely available under the predecessor rules | Overseas contracted-out R&D and certain overseas EPW expenditure is generally restricted for accounting periods beginning on or after 1 April 2024, subject to the statutory overseas exception |
Subcontracting & Customer vs Contractor Rights
Under the merged scheme, contracted-out R&D is generally claimable by the person who decides to undertake or initiate the R&D. HMRC looks at the contractual terms and surrounding circumstances to determine whether it is reasonable to assume that the customer intended R&D of the relevant sort to be performed when the contract was entered into. Merely commissioning technical work does not automatically make the customer the claimant, and the statutory test does not simply ask who paid or who bore financial risk.
Geographic Restrictions on Overseas Subcontractors
For accounting periods beginning on or after 1 April 2024, overseas contracted-out R&D and certain overseas externally provided worker expenditure is generally restricted. An exception can apply where all three statutory conditions are met: conditions necessary for the R&D are not present in the UK; those conditions are present where the R&D is undertaken; and it would be wholly unreasonable for the company to replicate the conditions in the UK. Relevant conditions can include geographical, environmental, social, legal or regulatory conditions. The cost of the R&D and availability of workers are specifically excluded as qualifying conditions for this exception.
Who Can Claim the Merged R&D Scheme?
The merged R&D expenditure credit is available to eligible trading companies carrying out qualifying R&D, subject to the statutory rules. It applies to accounting periods beginning on or after 1 April 2024. A company cannot simply assume that being incorporated in the UK is enough: it must carry on eligible activities, incur qualifying expenditure and satisfy the detailed R&D and Corporation Tax rules. A company that is eligible for ERIS may choose to claim under ERIS or the merged RDEC for the relevant expenditure, but the same expenditure cannot be claimed under both schemes.
The 20% RDEC Rate Is Not a 20% Cash Rebate
The merged scheme calculates a 20% expenditure credit by multiplying qualifying expenditure by 20%. The credit then passes through statutory payment steps. The credit is taxable and the amount ultimately available can be affected by the company's Corporation Tax or notional tax treatment, PAYE/NIC cap and other payment-step rules. Therefore, describing the scheme as a guaranteed 20% cash refund or a guaranteed 15% net cash return is incorrect.
Contracted-Out R&D: Who Claims?
The merged scheme introduced a common decision-maker approach for contracted-out R&D. HMRC's statutory guidance explains that R&D is treated as contracted out where a person enters into a contract for activities, the contractual activities include R&D, and having regard to the contract and surrounding circumstances it is reasonable to assume that the person intended R&D of that sort to be performed when entering the contract. The person who decides to undertake or initiate the R&D generally has the right to claim. The legislation does not simply use the labels customer, contractor, risk owner or payer as the decisive test.
Overseas Expenditure Restrictions
The overseas restriction applies to specified contracted-out R&D and externally provided workers where the relevant R&D takes place abroad. The restriction applies for accounting periods beginning on or after 1 April 2024. Overseas expenditure can still qualify where the statutory exception is satisfied. All three conditions must be met: necessary conditions for the R&D are not present in the UK; those conditions are present in the overseas location; and it would be wholly unreasonable for the company to replicate those conditions in the UK.
PAYE/NIC Cap for Merged RDEC & ERIS
Where the statutory PAYE/NIC cap applies, the amount of payable credit under both merged RDEC and ERIS is limited by £20,000 plus 300% of the company's relevant PAYE and National Insurance Contributions liabilities for the payment periods ending in the accounting period. The £20,000 component is proportionately reduced for an accounting period shorter than 12 months. There are statutory exemptions and special rules, so the formula should not be treated as an unconditional cap applying identically to every claimant.
Claim Notification vs Additional Information Form
The R&D claim notification form and the Additional Information Form (AIF) are separate requirements. Some companies must notify HMRC that they intend to make an R&D claim within the statutory claim notification period, while the AIF is required for every R&D relief or expenditure-credit claim covered by the legislation. The AIF must be submitted before or on the same day as the Company Tax Return, and if both are sent on the same day the AIF must be sent first.
Qualifying R&D and Software Development
The merged scheme does not make every innovative or technically difficult project qualifying R&D. The project must seek an advance in science or technology and resolve scientific or technological uncertainty that is not readily available or readily deducible by a competent professional. For software, ordinary application development, routine integration, maintenance, feature development, configuration or copying is not automatically R&D. Qualifying software expenditure can be claimed where the underlying project itself satisfies the statutory R&D definition.
Transitional Rules, ERIS & Special Cases
The relevant R&D regime depends on the company's accounting period. The old SME and old RDEC schemes were replaced for accounting periods beginning on or after 1 April 2024. Eligible loss-making R&D-intensive SMEs can claim ERIS instead of merged RDEC for the relevant expenditure. ERIS has a 30% R&D intensity condition for accounting periods beginning on or after 1 April 2024, plus separate loss and payable-credit rules. Northern Ireland companies can have additional ERIS provisions concerning overseas expenditure and State aid/de minimis limits.