R&D Tax Claims and Grants: Why Some SMEs Will Win with the Merged RDEC Incentive

A Shift in the R&D Tax Landscape

As the UK rolled out a significant overhaul of its research and development (R&D) tax relief system for accounting periods commencing on or after 1 April 2024, much of the public conversation has focused on what businesses stand to lose, particularly small and medium-sized enterprises (SMEs) accustomed to the more generous incentives of the legacy SME scheme. This dominant narrative misses an important part of the story: for several claims, especially those historically limited by the incentive, the new merged scheme could represent a step forward. In fact, some companies will be better off under the new rules.

Some SME companies may see that their R&D operations are about to result in a significantly greater tax relief because of two major changes: how subcontracted R&D costs and grant-funded work are treated under the merged Research Development Expenditure Credit (RDEC) scheme. Elle Clarke, R&D Technical Consultant at Ryan, explores scheme challenges, what’s changing, and what these changes mean for SMEs.

Old Challenges Under the SME and RDEC Schemes

In the old world, companies accessed R&D tax relief through different mechanisms dependent on their eligibility: the SME scheme and the RDEC scheme. Each had its own rules and, crucially, its own limitations.

For an SME, if the company received Notified State Aid, the entire project would fall under the RDEC scheme. In contrast, other forms of subsidised expenditure result in a mixed claim, where the non-subsidised portion may still be eligible under the SME scheme, and the subsidised portion must be claimed under RDEC. This often led to significantly reduced relief not only because of the claimable expenditure (the lower rate of relief) but also because, under the RDEC scheme, subcontractor costs are withheld from the claim unless paid to qualifying exempt parties. As a result, some companies often couldn’t claim major portions of their spending.

How Does RDEC Work?

For financial periods starting on or after 1 April 2024, the merged RDEC scheme brings SMEs and large companies under one unified framework, based on the principles of the old RDEC scheme but with some critical enhancements.

Among these improvements are:

• Expanded eligibility for subcontractor costs: Companies can now claim R&D relief for a broader range of subcontracted work, including work done by other companies, not just qualifying bodies, individuals, and charities. This is a major shift that removes a longstanding barrier for RDEC-style claims.
• Subsidised expenditure does not impact scheme eligibility: The new scheme no longer treats grant funding as expenditure automatically excluded or ringfenced. This means that companies that receive innovation grants are no longer forced to switch to a less generous claim path purely because they accepted funding.

What the Merged Scheme Means for SMEs

For SMEs who have taken advantage of Notified State Aid in the project funding, and who use external subcontractors for their R&D activities, these changes are substantial. Under the merged scheme, they can now include previously ineligible subcontractor costs and fully account for their R&D investment, without being previously penalised for accepting grants.

Overall, the reaction to the new R&D scheme has largely focused on what’s being taken away. As illustrated, that’s only half the story. For some, yes, that may mean adapting to a lower rate of relief, but for others, it’s a welcome change to see a benefit on a greater proportion of their project expenditure.

Navigating Grant Funding with Expert Support

To help companies fully capitalise on these changes and get help for funding their innovative projects, Ryan’s expert grants team provides hands-on support throughout the entire funding journey. Dr. Laura O’Neill, Grants Manager at Ryan, shares a typical experience of the grant application process:

“Grant funding can be a complex minefield for companies to navigate. Funds are announced with short timelines for submission, the assessment process can be ambiguous, and success rates for the most popular competitions can be under 2%. At Ryan, our team works closely with clients throughout the bid-writing phase, guiding them to craft compelling proposals that increase their chances of success. Clients are assigned a team of consultants who will work to understand their technology, innovation, motivation, commercial strategy, and project details and help to articulate these within the application document. This process typically takes four to six weeks.

“Once a grant has been awarded and the company has passed the financial due diligence checks, the project can begin, and the grant can be claimed. Typically, innovation grants require a portion of matched funding and are paid quarterly in arrears. The claiming company will carry out and pay for the project for three months before being assessed by an independent monitoring officer, who will verify the claim and allow the grant-funded portion to be paid.

“Ryan supports clients with our project management service, helping them to prepare the necessary materials for quarterly reviews and ensuring the maximum grant is paid out at the earliest opportunity.”

Partner with Ryan

Our R&D tax relief specialists conduct a thorough eligibility assessment to determine if your activities qualify, ensuring all eligible expenses are captured for maximum benefit. They handle the complex calculations and prepare detailed documentation, including technical and financial records, to support your claim. Additionally, the team manages all HMRC interactions, ensuring compliance and providing ongoing support to optimise your tax relief.