5 Ways Regulatory Changes Impact RDEC Claims

The UK’s R&D tax relief system has undergone major changes. From 1 April 2024, the SME and RDEC schemes merged into a single framework. This new system introduces a 20% gross credit rate, stricter compliance rules, and shifts in claim eligibility. Here’s what you need to know:

• Unified RDEC scheme: A 20% gross credit rate (15% net benefit for profitable companies, 16.2% for loss-making ones) replaces the dual SME and RDEC schemes.
• Subcontracted R&D: Claims now generally belong to the customer commissioning the R&D, not the contractor.
• Overseas costs: Payments to overseas contractors face tighter restrictions unless specific conditions are met.
• Intra-group payments: Simplified rules ensure tax-neutral treatment for surrendered credits within corporate groups.
• Mandatory compliance steps: Additional Information Forms (AIFs) and strict notification deadlines are now required.

These changes demand precise documentation and a clear understanding of the new rules to avoid rejected claims. For businesses with a year-end of 31 March, these updates are already in effect.

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1. The Merged RDEC Scheme

The Merged RDEC Scheme marks a significant shift in how UK companies can access R&D tax relief. Starting from 1 April 2024, this unified system will replace the previous dual-track setup, which included the SME scheme and the RDEC regime. However, loss-making, R&D-intensive SMEs will continue to operate under the ERIS regime.

This scheme functions as an "above-the-line" taxable credit, which increases pre-tax profits by providing a 20% gross credit on eligible R&D expenses. For companies earning profits and paying the main 25% corporation tax rate, this translates into a net benefit of 15%. On the other hand, loss-making companies enjoy a slightly higher benefit of 16.2%, as the notional tax deduction is calculated using the smaller profits rate of 19%. These changes also pave the way for updates regarding subcontracted R&D and subsidised expenditure.

One major update is the treatment of subcontracted R&D. Large companies can now claim credits for R&D activities they subcontract to third parties. This is a notable departure from the previous rules, which generally limited such claims to specific qualifying bodies.

Another important change is the removal of SME-style restrictions on subsidised R&D expenditure. In the past, receiving a grant could reduce or even nullify the available relief. Under the new rules, all subsidised R&D expenditure is now fully eligible for the credit.

It’s crucial to check HMRC’s notification requirements before submitting a claim. New claimants, or those who haven’t made a claim in the last three years, must notify HMRC within six months of the end of their accounting period. Missing this deadline could result in losing the ability to claim altogether.

2. New Rules for Intra-Group Payments

The updated rules for intra-group payments, introduced alongside changes to the Merged RDEC Scheme, aim to simplify the process of claiming RDEC. According to the Finance Bill 2025-26, these rules, effective for payments made on or after 26 November 2025, clarify the tax treatment of intra-group payments for surrendered RDEC. The goal is to ensure a tax-neutral approach, making it easier for group companies to manage R&D credits.

Under these changes, intra-group payments up to the amount of the surrendered credit are excluded from taxable income, deductions, and distributions. This adjustment provides a more streamlined way for companies within the same group to handle RDEC claims. It also sets the stage for further updates on subcontracted R&D, which will be covered in the next section.

The process of group surrender occurs at Step 5 in the seven-step RDEC calculation framework. At this point, a company can transfer its remaining RDEC credit to other companies within the group, allowing them to offset their corporation tax liabilities. This mechanism offers flexibility, enabling groups to optimise the value of their R&D credits across their corporate structure.

"The administrative changes to RDEC provide helpful clarity on the tax treatment of intra-group payments, simplifying compliance, reducing administrative burdens, and promoting consistency and fairness for businesses." – Deloitte

To maintain tax neutrality, it’s crucial that intra-group payments do not exceed the surrendered credit. Large companies planning these transfers are advised to coordinate with their HMRC Customer Compliance Manager to ensure the manual processing of RDEC offsets is handled correctly.

For companies navigating these updates, expert guidance can be invaluable. Firms like Zest R&D Tax Advisors offer specialised support in adapting to regulatory changes and maximising R&D tax relief opportunities.

3. Updated Contracted-Out R&D Rules

The rules for claiming relief on subcontracted R&D have been updated under the merged RDEC scheme, which applies to accounting periods starting on or after 1 April 2024. These changes redefine who can claim relief for contracted-out R&D, placing the responsibility primarily on the customer – the company commissioning the R&D – rather than the contractor performing the work.

To qualify for relief on contracted-out R&D, customers must satisfy a three-step test:

• There must be a contract in place (this can be written, verbal, or implied).
• The R&D work must be carried out to meet the obligations outlined in the contract.
• At the time of contracting, the customer must have reasonably anticipated that R&D would be necessary.

These steps are designed to ensure clarity and accountability, making it clear that the customer must take an active role in initiating the R&D process.

"The customer must be able to specify the required R&D, understand the R&D and be able to articulate the nature of the R&D. Mere speculation, general awareness, or acceptance that R&D may be needed will not be sufficient."
– Darryl Hoy, Technical Director, Shorts

Contractors, however, may still claim in specific situations. This includes cases where the customer did not foresee the need for R&D or where the customer is an ineligible entity, such as a charity, higher education institute, government department, or an overseas company not subject to UK Corporation Tax. For third-party costs, companies can generally claim 65% of the qualifying payment made to the contractor.

To align with these updated rules, maintaining clear and detailed contractual records is now critical. Large companies should ensure contracts explicitly outline R&D requirements, keep thorough supporting documentation, and record details on risk and intellectual property ownership. These practices help HMRC determine who is eligible to claim under the new framework. For additional guidance on navigating these changes and maximising RDEC claims, businesses can consult Zest R&D Tax Advisors.

4. Limits on Overseas Subcontractor Costs

From 1 April 2024, payments made to overseas contractors and externally provided workers (EPWs) will generally no longer qualify for R&D Tax Relief under the merged RDEC scheme. This represents a shift in how international R&D resources are utilised.

Under these revised rules, EPWs must meet a strict requirement to qualify for relief: they must be subject to UK PAYE and National Insurance contributions. If this condition isn’t met, their gross pay and related agency fees will not be eligible for relief. For EPWs who meet the criteria, companies can typically claim relief on up to 65% of their costs, provided the provider is unconnected and the worker complies with the UK tax rules. However, the scope for claiming relief on overseas costs is now very narrow.

There is one exception under the Qualifying Overseas Expenditures (QOEs) rule. Relief for overseas costs is only permitted if all three of these conditions are satisfied:

• The specific conditions required for the R&D are not available in the UK.
• These conditions are present in the location where the R&D is conducted.
• Recreating these conditions in the UK is considered entirely unreasonable.

Examples of valid conditions include geographical factors (e.g., tectonic activity), environmental needs (e.g., sub-zero temperatures), or legal requirements (e.g., clinical trials requiring local regulatory approval). However, lower costs or the lack of skilled workers in the UK are explicitly excluded as valid reasons.

"If your primary offshoring reason was cost or talent shortages… then, spending on overseas EPWs and contractors associated with that R&D will not qualify for relief."
– GrantTree

For contractors working both within and outside the UK, costs must be allocated proportionately using measurable metrics, such as the number of days spent on UK versus overseas work. Keeping detailed records of subcontractor locations and time allocations is critical to ensure compliance with HMRC requirements. Next, we’ll look at mandatory tax adviser registration and ANF submissions.

5. Required Tax Adviser Registration and ANF Submissions

From 8 August 2023, any company making a claim under the RDEC or merged scheme must submit an Additional Information Form (AIF) digitally before filing their CT600. This step aims to streamline the reporting of technical and financial details, helping HMRC verify legitimate claims and minimise fraud risks.

The AIF submission also requires details about any tax adviser involved in preparing the R&D claim. Companies must ensure they have their adviser's contact information and registration details ready, as these fields are now mandatory. For more detailed assistance with these requirements, businesses can consult Zest R&D Tax Advisors, experts in R&D tax relief.

For companies that haven’t claimed in the past three years, there’s an additional requirement: a Claim Notification Form must be submitted within six months of the end of the accounting period. Missing this deadline could result in losing the claim. To confirm compliance on the CT600, tick Box 656 for the notification form and Box 657 for the AIF.

Large companies need to integrate these digital requirements into their compliance processes. The AIF must be submitted before the CT600 to avoid automatic rejections by the system. For groups with multiple subsidiaries, each company must handle its own notifications and claims individually. These steps are part of the broader regulatory updates affecting RDEC claims.

To adapt to the new RDEC process, collaboration between technical and finance teams is crucial. Technical teams should compile project summaries and outline the uncertainties tackled, while finance teams prepare detailed cost breakdowns for the online submission. Maintaining up-to-date records of projects and related expenses will help ensure a smooth and efficient submission process.

Conclusion

RDEC claims are now subject to a reshaped regulatory framework that demands immediate attention. The merged scheme brings a 20% credit rate alongside tighter restrictions on overseas subcontractors, pushing companies to rethink their R&D locations and contractual arrangements. Adjustments to intra-group payment rules and the criteria for contracted-out R&D also call for a thorough review of current practices.

These updates significantly influence the financial aspects of RDEC claims. Despite the changes, the net benefits remain appealing for both profitable and loss-making companies. With employers' National Insurance contributions set to rise to 15% from April 2025, it's likely that qualifying costs in claims will increase as well.

HMRC has stepped up its scrutiny, making detailed and accurate documentation more critical than ever. Companies need to maintain comprehensive records, covering project details, technical uncertainties, and cost breakdowns, to meet compliance standards. Contractual language must clearly define which party "intends" the R&D, and supply chains may need auditing to assess the effects of overseas restrictions.

Adapting quickly to these changes is crucial to safeguarding your tax position and avoiding potential penalties or rejected claims. For businesses with a 31 March year-end, the new rules are already in effect. Engaging expert support can help ensure all eligible costs, including newly qualifying categories, are captured.

Zest R&D Tax Advisors offers specialised guidance to help companies navigate the merged RDEC scheme, prepare compliant submissions, and handle HMRC enquiries. Their expertise can assist large businesses in aligning their processes with the updated standards while maximising relief under the new framework. These changes highlight the importance of proactive adjustments to stay compliant and optimise your RDEC claims.

FAQs

Which scheme applies to my accounting period from 1 April 2024?

Starting from 1 April 2024, your accounting period will be subject to the new merged R&D scheme. This scheme consolidates the previous RDEC and SME schemes, streamlining the process for most companies. However, it’s worth noting that loss-making R&D-intensive SMEs are an exception and will not fall under this merged scheme.

Who can claim when R&D is subcontracted under the new rules?

Under the updated regulations, a company that identifies the need for R&D can claim expenses for subcontracted work. However, this is only allowed if the activities take place within the UK and the company keeps thorough documentation. Maintaining accurate records is essential to ensure compliance with these rules.

When do overseas contractor costs still qualify for RDEC?

Overseas contractor costs may be eligible for RDEC if the work is carried out within the UK or if reproducing the R&D activities domestically would be entirely impractical. This applies in situations where the necessary expertise or facilities are exclusively available abroad and cannot be found within the UK. However, strict criteria must be satisfied to prove such circumstances.

Related Blog Posts

• What Qualifies for R&D Tax Relief? FAQ Guide
• New R&D Expenditure Rules 2025
• RDEC Qualifying Costs Explained
• ERIS Regulation Changes 2026