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RDEC Changes In 2025: What UK Companies Need to Know

Understanding R&D Capitalization can be tricky, especially when regulations and guidelines change. For many UK businesses, the Research and Development Expenditure Credit (RDEC) scheme can be a lucrative way to reclaim a percentage of their R&D costs. However, significant changes to the scheme will take effect in April 2025. This article will walk you through what you need to know about these changes to help you prepare.

Haven provides accounting services for small businesses to help relieve the stress of record-keeping and tax preparation so that you can focus on your operations. With our knowledge and expertise, we can help you get the most out of your R&D Capitalization, including upcoming changes to the RDEC scheme.

What is Research and Development Expenditure Credit (RDEC)?

The Research and Development Expenditure Credit (RDEC) is a UK government incentive designed to encourage large companies to invest in research and development (R&D).

It allows companies to claim a tax credit for qualifying R&D activities, even if they are not currently paying corporation tax due to low or no profits.

Who Can Claim RDEC?

RDEC is primarily targeted at:

Large companies, as defined under EU rules (usually with more than 500 staff or a turnover exceeding €100 million and €86 million in gross assets).
SMEs that have been subcontracted to carry out R&D by a larger company or are otherwise ineligible for the more generous SME R&D scheme (e.g., due to receiving grant funding).

How Does It Work?

Under the RDEC scheme, companies can claim a 13% taxable credit (as of 1 April 2020) on eligible R&D expenditure. After tax, the net benefit is around 10.53%. Crucially, this is an above-the-line credit, meaning it appears as income in the company’s accounts and boosts reported profit.

This enhances profit-and-loss reporting and can positively influence how investors and stakeholders view R&D investments.

What Counts as Qualifying R&D?

R&D activities must aim to achieve an advance in science or technology, and involve overcoming scientific or technological uncertainties.

Qualifying costs typically include:

Staff salaries related to R&D
Materials consumed in R&D
Software used in R&D
Utility costs (like power and water)
Subcontractor and external staff costs (with some limitations)

Cash Benefit and Payability

Even if a company is not in a taxpaying position (i.e., making a loss), it may still receive the RDEC credit as a cash payment, subject to a set of caps and restrictions, such as the PAYE/NIC cap (which limits the cash benefit based on how much the company pays in payroll taxes).

The RDEC scheme will be replaced by the new merged R&D scheme (R&D Expenditure Credit) for all claims related to accounting periods starting on or after 1 April 2024. Businesses claiming for accounting periods before this date must continue to follow the original RDEC rules.

Key Changes in the 2025 RDEC Landscape

New Credit Rates and Thresholds: Less is More In 2025

The RDEC credit rate was 20% for accounting periods starting before April 2024. Under the new merged R&D scheme, this rate is adjusted to approximately 15% to 16.2% of qualifying expenditure.

The R&D intensity threshold for eligibility for the Enhanced R&D Intensive Support Scheme (ERIS) has been lowered from 40% to 30%. Allowing more SMEs to qualify for this enhanced relief.

Expanded Eligibility: RDEC is For Everyone Now

The new merged RDEC scheme is now available to all companies, including SMEs that previously claimed under the SME R&D relief scheme. This unification simplifies the tax relief system but generally results in lower relief rates for SMEs compared to the old SME scheme.

ERIS specifically targets loss-making and R&D-intensive SMEs, providing them with enhanced relief (up to 27%) to support innovation despite unprofitability.

Changes to Subcontracted and Overseas R&D: Keep It Domestic

Relief for payments made to overseas subcontractors and externally provided workers (EPWs) is no longer available if the R&D work is conducted outside the UK. This change restricts claims on non-UK R&D activities, focusing support on domestic innovation.

New rules clarify contracted-out R&D: only the company conducting the R&D can claim relief, not the subcontractor. This reverses some previous entitlements and affects how companies structure research and development (R&D) contracts.

Subsidised Projects: More Funds for Innovation

Restrictions on claiming relief for projects that receive grants or subsidies have been lifted. Under the merged scheme, companies can now claim more generous relief on subsidised R&D projects, broadening the scope of eligible expenditure.

Additional Notes: Changes Coming Down the Pipeline

Companies must notify HMRC within six months of the accounting period end about their intention to claim R&D relief under the new scheme. The merged scheme aims to simplify the UK R&D tax credit system, reduce fraud, and encourage innovation by providing a more accessible, above-the-line credit system.

These changes collectively represent a significant shift in the UK’s R&D tax incentives, affecting claim processes, eligibility, and the financial benefits companies can expect from their innovation investments.

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Impact on SMEs and Large Companies

The Shift from SME to RDEC

The merged R&D scheme has a significant impact on SMEs, particularly those that previously benefited from the old SME scheme, which offered generous tax relief rates of around 21.5%. The new RDEC scheme replaces the SME scheme entirely, meaning that SMEs will now typically receive less relief than before.

Enhanced R&D Intensive Support

To support loss-making but Research and Development (R&D)- intensive small and medium-sized enterprises (SMEs), the government introduced the Enhanced R&D Intensive Support (ERIS) scheme. This scheme targets unprofitable SMEs with at least 30% of their total expenditure on qualifying R&D, allowing them to claim enhanced relief of up to 27%, which includes a non-taxable credit and extra deductions.

This measure will help sustain the innovation efforts of highly innovative but unprofitable small and medium-sized enterprises (SMEs).

Changes to Contracted-Out and Overseas R&D

SMEs that rely on subcontracted R&D or overseas R&D will be affected because relief is no longer available for payments to overseas subcontractors or externally provided workers (EPWs) if work is done outside the UK.

Only the company conducting the R&D can claim relief, which alters previous entitlements and requires SMEs to review their contractual arrangements carefully.

Cash Flow and Tax Planning Effects

The reduced credit rate means SMEs may see lower immediate cash tax benefits, impacting cash flow. Loss-making SMEs qualifying for ERIS may benefit from improved cash flow through the enhanced non-taxable credit. SMEs need to adjust tax planning and budgeting to reflect the new rates and eligibility criteria.

The Impact on Large Companies

The merged R&D scheme also impacts large companies but in a more favourable way than SMEs. For large companies, the RDEC scheme provides a simplified and more generous above-the-line credit.

Large companies now claim under the merged scheme at a similar above-the-line credit rate (around 15-16.2%), simplifying the previous dual system. This credit is taxable as trading income but improves reported profitability and cash flow compared to the old RDEC scheme’s below-the-line treatment.

Streamlined Compliance and Claim Process

The merged scheme reduces complexity by unifying rules and rates, making it easier for large companies to plan and claim R&D relief. Restrictions on overseas subcontracted R&D and changes to subcontracting rules still require careful contract management.

Financial Reporting and Tax Planning

The above-the-line credit enhances financial statements by increasing operating profit, which can positively influence investor perceptions and borrowing capacity. Tax planning can be more straightforward, but companies must ensure compliance with the new subcontracting and overseas R&D rules to avoid disallowed claims.

Compliance and Claiming Process Updates

New Compliance Requirements for R&D Tax Relief Claims

For accounting periods beginning on or after 1 April 2023, companies intending to claim R&D tax relief must notify HMRC of their intention either during the accounting period or within six months of its end. For instance, a company with a year-end date of March 31, 2024, must submit its notification by September 30, 2024.

This requirement mainly applies to first-time claimants or companies that haven’t submitted an R&D claim in the last three years. Businesses that have filed claims within regular deadlines over the past three years may be exempt.

How the R&D Notification Differs from a Full R&D Tax Credit Claim

Notification is made via a dedicated online form, which asks for company details, adviser contact information, and a summary of the planned R&D activities, demonstrating how the project meets the eligibility criteria. While less detailed than the complete claim documentation, this step is critical to preserve your right to claim.

Keep Good Records of Your Claims

While the notification form requires only a summary, companies must maintain detailed and contemporaneous documentation to support their R&D claims when submitting the full claim via the Company Tax Return.

This includes project descriptions, technical uncertainties addressed, qualifying costs, and financial records. Good recordkeeping is crucial to withstand HMRC scrutiny and potential audits, especially given the tightening of rules and increased focus on compliance.

Challenges and Tips for Adapting to the New Claim Process

Meeting Deadlines: The six-month notification deadline is strict. Missing it can result in losing the ability to claim for that accounting period unless an exemption applies. Companies with short or irregular accounting periods (e.g., those following a takeover) should closely monitor deadlines.
Multiple Entities: Notifications and claims are made on a company-by-company basis. Groups with multiple subsidiaries must ensure each entity complies separately.
Administrative Burden: The new process introduces an additional administrative step before a claim can be submitted, necessitating coordination between technical teams and finance/tax departments to prepare the notification and subsequent claim.
Evolving Guidance: HMRC’s guidance has evolved, and some past misinterpretations led to administrative easements allowing late claims if certain conditions were met. Companies should stay updated and seek professional advice if unsure.
Utilizing Agents and Advisors: Engaging R&D tax specialists can help navigate the notification and claim process, ensuring accuracy and maximizing eligible tax relief.

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The credit is especially valuable for startups, which may be eligible for significant benefits under recent tax rule changes. Eligible companies can receive over $1 million in cash benefits simply by filing for the R&D tax credit while developing new technologies or processes.

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