The Finance Act 2024 introduced the merged R&D scheme that, for accounting periods beginning on or after 1 April 2024, replaces the long-running SME R&D Tax Relief and the previous Research and Development Expenditure Credit (RDEC) with a single regime - with a separate enhanced relief for R&D-intensive loss-making SMEs. By 2026 the new regime is bedded in but its economics are different from what advisors and clients are used to. Here is the honest comparison.
The Old SME Scheme
Under the former SME regime, qualifying companies could claim an additional 86% deduction on qualifying R&D expenditure (reduced from 130% in April 2023). Loss-making SMEs could surrender the loss for a payable tax credit at 10% (reduced from 14.5%, with a special 14.5% rate retained for R&D-intensive SMEs).
This was a generous regime by international standards and supported many UK technology and life sciences companies through their early-stage losses.
The Old RDEC Scheme
Large companies and SMEs in receipt of grant funding or subcontracted work claimed under RDEC - a 20% above-the-line credit (raised from 13% in April 2023) treated as taxable income. Net of corporation tax this delivered approximately 16% effective cash benefit.
RDEC was less generous than the old SME scheme but more predictable and visible in the P&L.
The Merged Scheme Mechanics
The merged scheme effectively extends RDEC to most claimants. The headline credit is 20% above-the-line, taxable as income. The net cash benefit is approximately 15-16% depending on the company's tax rate. Subcontracted R&D rules and treatment of overseas costs have tightened significantly under the merged scheme.
For most former SME claimants the move from 86% additional deduction to a 20% above-the-line credit represents a notable reduction in net benefit.
The Enhanced R&D Intensive SME Regime
Loss-making SMEs whose R&D expenditure is at least 30% of total expenditure (reduced from 40% by Finance Act 2024) qualify for an enhanced regime: 86% additional deduction plus a payable credit at 14.5% of the surrendered loss. This preserves something close to the old SME economics for genuinely R&D-intensive loss-making businesses - typically early-stage biotech, deep tech and certain software companies.
The 30% intensity test must be calculated carefully and there are anti-fragmentation rules to prevent groups from artificially qualifying.
Cash Impact Worked Example
A profitable SME spending £500,000 on qualifying R&D in a tax period under the old regime claimed an 86% uplift = £430,000 additional deduction, saving £107,500 at 25% Corporation Tax. Under the merged scheme the same company claims a 20% credit = £100,000 above the line, taxable at 25%, net benefit £75,000.
The cash gap of £32,500 is meaningful and consistent across most profitable claimants moving from old SME to merged.
Subcontracted and Overseas Costs
The merged scheme has reformed subcontracted R&D rules: the company that decides to undertake the R&D claims, not the subcontractor. Overseas expenditure is generally restricted unless qualifying overseas expenditure conditions are met. Many groups have had to restructure their R&D contracting arrangements.
Pre-Notification and Claim Process
HMRC introduced mandatory pre-notification for first-time claimants (and certain returning claimants) and the additional information form requirements have tightened. Claims are subject to more scrutiny than under the old regime, with a sustained programme of HMRC compliance activity through 2024-2026.
Verdict
The merged scheme is broadly less generous than the former SME regime for most profitable claimants, broadly equivalent to the former RDEC for large companies, and roughly preserves the old SME economics for genuinely R&D-intensive loss-making SMEs through the enhanced regime. For advisors, the key actions in 2026 are: educate clients on the changed cash benefit, review subcontracting structures, prepare for pre-notification timing, and verify intensity calculations carefully where the enhanced regime is in scope.