UK R&D Tax Relief is Changing: What You Need to Know from April 2024

As of April 1st, 2025, the UK’s R&D tax relief system has been undergoing its most significant reform in recent years. In a move designed to simplify and streamline R&D Tax, the government is merging the existing SME and RDEC (Research and Development Expenditure Credit) schemes into a single unified RDEC-style scheme – with additional, targeted support available for R&D-intensive SMEs. These reforms will impact how companies across the UK plan, account for, and claim their R&D tax relief. Whether you’re an early-stage startup or an established business, understanding the practical implications of these changes is critical to optimising your funding strategy.

 

The New Merged RDEC Scheme: One Framework for All

The newly merged RDEC scheme creates a unified framework for claiming R&D tax relief, irrespective of company size. Key features of the updated scheme include:

• 20% taxable credit: Businesses will be able to claim a 20% taxable credit on qualifying R&D expenditure.
• Above-the-line treatment: As with the traditional RDEC model, the tax credit is included in the company’s pre-tax income.
• Seven-step calculation process: Follows the established seven-step RDEC methodology, ensuring continuity in calculation and compliance procedures.
• Agnostic to notified state aid: I.e. grants being received for the R&D project.

This harmonised structure is aimed at improving clarity for claimants and providing a more consistent experience when navigating the incentive.

 

Enhanced Support for R&D-Intensive SMEs (ERIS)

Recognising the unique challenges faced by high-spending companies, the government has introduced a tailored support mechanism for R&D-intensive SMEs. To qualify for Enhanced R&D Intensive Support (ERIS), companies must demonstrate that at least 30% of their total costs is attributable to qualifying R&D activities. Eligible businesses will benefit from:

• An additional 86% deduction on qualifying R&D expenditure
• A 14.5% payable tax credit on surrenderable losses

This is vital for R&D-heavy, loss-making companies that rely on tax incentives to maintain cash flow and continue innovating through uncertain periods.

 

New Rules for Contracted-Out R&D: Who Can Claim?

The reform introduces a clarified framework for contracted-out R&D, addressing a longstanding grey area in the legislation. Under the new rules, a company can claim R&D tax relief for work carried out by third parties if the following conditions are met:

• A contract exists for the R&D work
• The contractual obligations require R&D to be carried out
• The company reasonably expected R&D would be needed
• Ownership of IP, level of direction, and the involvement of competent professionals will also be considered to determine whether the customer or contractor has the right to claim

This update is particularly relevant for companies outsourcing development work or collaborating with external technical teams and may require a reassessment of contractual and operational arrangements.

 

Refocusing Relief on UK-Based R&D Activity

Another notable change is the restriction on claiming relief for overseas R&D expenditure. As you would have likely seen last year, from April 2024, businesses will only be able to claim for UK-based R&D costs, except in limited circumstances where:

• The required conditions for the R&D do not exist in the UK
• Replicating those conditions would be unreasonable or unfeasible
• The overseas activity is essential to the project and cannot be carried out locally

This aims to incentivise investment in domestic innovation infrastructure, though it also presents challenges for companies reliant on overseas expertise or facilities.

 

Preparing for Change: Time to Review Your Strategy

These reforms come at a time of increasing scrutiny from HMRC and a broader push for accountability and compliance across the innovation funding space. The changes present both risks and opportunities and now is the time for businesses to review their approach. Businesses like Walmer Group were set up to work closely with clients to navigate these developments and prepare robust, forward-looking strategies.