1. The Merged R&D Scheme: A Simplified but Stricter Regime

Starting April 2024, the UK replaced its previous two-scheme R&D structure (SME Scheme + RDEC Scheme) with a single unified system — often referred to as the Merged R&D Scheme. The aim was to simplify the process, reduce abuse, and align incentives more closely with genuine innovation.

Here’s how the merged scheme works:

1.1 Who Qualifies Under the New R&D Scheme?

The scheme broadly supports companies that:

• Develop new or improved products
• Create or enhance software
• Build proprietary technology
• Develop new manufacturing processes
• Conduct scientific or engineering R&D projects

The core criteria remain aligned with the HMRC definition: overcoming scientific or technological uncertainty.

1.2 Relief & Credit Rates Under the Merged Scheme

Under the merged structure:

• R&D relief is offered through a single above-the-line credit (similar to the older RDEC).
• This makes the benefit visible “above operating profit,” improving EBITDA metrics — especially important for funded startups and venture-backed companies.

R&D Intensive SMEs Still Get Extra Support

Companies that spend 40% or more of total expenditure on R&D are classified as R&D-intensive and receive:

• Higher rates of relief, and
• The ability to claim enhanced payable credits.

This supports life sciences, AI startups, deep-tech ventures, and advanced engineering companies.

2. Tighter Compliance & Fraud Prevention Measures

The new regime places heavy emphasis on compliance and documentation.

Key requirements:

• Mandatory digital claims portal
• New additional information form with technical summaries
• Details of competent professionals involved
• Breakdown of qualifying costs
• Proof of subcontractor relationships

Businesses should expect more HMRC enquiries, especially for:

• Software claims
• Claims with heavy subcontractor costs
• “Routine” development misclassified as R&D

3. Capital Allowances: A New Investment Landscape (2025–26)

Alongside R&D reforms, the UK is also changing how capital expenditure is treated for tax purposes, this directly impacts businesses planning machinery, equipment, or technology investments.

3.1 Reduction in Writing-Down Allowances (WDA)

From April 2026:

• Main pool WDA reduces from 18% to 14%
• Special rate pool WDA may face future tightening

This means tax relief on plant and machinery will reduce over time, unless companies utilise upfront allowances.

3.2 New 40% First-Year Allowance (FYA)

From 1 January 2026, businesses can claim:

• 40% FYA on main-rate plant and machinery investments
• Immediate deduction in the year of purchase
• Remaining 60% deducted using WDAs over future years

FYA is one of the most generous investment incentives introduced in recent years, particularly for:

• Manufacturing units
• Logistics & warehousing
• Engineering companies
• Construction & infrastructure businesses
• Technology/data centres

3.3 Full Expensing vs First-Year Allowance: Which is Better?

For large companies already eligible for full expensing (100% deduction):

• FYA will complement but not replace FE
• Full expensing remains the most attractive option for qualifying expenditure

For companies that don’t qualify for full expensing:

• FYA becomes the next best route to accelerate tax relief
• SMEs stand to benefit considerably

4. The Interaction Between R&D Tax Relief & Capital Allowances

Capital assets used in R&D activities can qualify for:

• R&D deductions, and
• Enhanced capital allowances (like FYAs)

Examples:

• Servers used for software development
• Laboratory equipment
• Manufacturing prototypes
• Testing rigs and specialised machinery

Businesses should classify assets carefully because:

• R&D deductions offer one route
• Capital allowances (FYA, AIA, FE) offer another
• In some cases, combining optimally yields the highest effective tax relief

Getting this wrong can cost companies thousands in lost tax benefits.

5. New Rules on Overseas R&D & Subcontractor Costs

The merged scheme retains the tougher restrictions introduced previously.

Overseas R&D Costs Are Limited

Companies can only claim overseas R&D expenses where:

• The work cannot be carried out in the UK, AND
• There are “material and compelling reasons”
  such as:
  • Geographical/climatic constraints
  • Unique overseas facilities
  • Specialist expertise not available in the UK

Subcontractor R&D Rules Tightened

Only certain R&D subcontractor arrangements are eligible.

Businesses must ensure:

• Proper contracts are in place
• The claiming company retains responsibility for the R&D outcomes
• Subcontractors are UK-based (in most cases)

6. Practical Tax-Planning Opportunities for 2025–26

Here’s where UK companies can unlock significant value.

6.1 Time Capital Expenditure Strategically

With FYAs arriving and WDAs falling:

• Companies should consider accelerating capex into FY 2025 to maximise relief
• Or delaying certain purchases until 2026 to benefit from the new 40% FYA

Accountants should model both scenarios.

6.2 Combine R&D Relief With FYAs or AIA

Smart grouping of:

• R&D capital costs
• AIA (Annual Investment Allowance)
• FYAs
• Full expensing
  can reduce corporate tax burdens dramatically.

For example:

• A £500,000 equipment purchase used for R&D may qualify for
  both R&D revenue deductions and accelerated capital allowances.

6.3 Prepare Strong R&D Documentation Before Year-End

HMRC is aggressively tightening reviews.

Documentation should include:

• Technical uncertainties
• Hypotheses
• Experiments and iterations
• Competent professional evidence
• Time-tracking
• Cost breakdowns
• Subcontractor agreements

This reduces enquiry risk and improves credit certainty.

6.4 Claim R&D Relief Even If Loss-Making

The merged scheme allows tax credit payments (cash refunds) in some cases.

Ideal for:

• Startups
• Biotech
• SaaS companies
• Early-stage engineering firms

Cash credits support runway without diluting equity.

6.5 Ensure R&D-Intensive SME Status Is Protected

Companies close to the 40% threshold should:

• Track R&D expenditure monthly
• Forecast qualifying vs non-qualifying projects
• Allocate costs properly
• Avoid erosion of the intensive status by poor cost categorisation

7. Strategic Considerations for Accountants & Outsourced Finance Teams

These reforms increase demand for:

• R&D claim management
• Capital allowance modelling
• Advisory services
• HMRC enquiry support
• Compliance documentation
• Cost allocation restructuring

Outsourced teams (including offshore CA firms) can support by:

• Preparing R&D technical narratives
• Maintaining contemporaneous documentation
• Modelling tax impact of new FYAs
• Preparing asset registers
• Assisting with payroll, grants, and cost classification
• Assisting UK accountants during peak filing seasons

8. Action Plan for CFOs & Business Owners (2025–26)

Here’s a checklist companies can implement immediately.

✔ Conduct a capital expenditure review

Reassess purchase timelines to optimise FYAs.

✔ Perform an R&D eligibility scan

Identify qualifying projects early.

✔ Update R&D documentation systems

Shift to real-time tracking rather than year-end reconstruction.

✔ Review subcontractor agreements

Ensure compliance with new HMRC rules.

✔ Map out claim timings

Optimise for cash flow vs tax relief.

✔ Consult accountants on combined relief strategy

Sometimes using R&D + FYA + AIA together produces a significantly better outcome.

Conclusion

The UK government’s changes to R&D tax relief and capital allowances represent both opportunity and responsibility for businesses. While the merged scheme simplifies the overall structure, it increases scrutiny. Alongside this, the introduction of the 40% First-Year Allowance and revisions to WDAs reshape how companies should plan their investments.

For companies willing to approach these changes proactively with strong documentation, strategic investment planning, and expert guidance 2025–26 offers one of the most favourable environments for innovation-led tax savings in recent years.