Why the merged RDEC scheme changes are disproportionately affecting construction R&D claims

The UK’s merged R&D Expenditure Credit (RDEC) scheme has materially changed how construction businesses should approach innovation tax relief. For accounting periods beginning on or after 1 April 2024, most companies now claim under a  new merged scheme based on the old RDEC model whilst also drawing on some features of the old SME scheme.

The previous SME and RDEC regimes have largely been brought together, although enhanced support remains available for qualifying loss-making R&D-intensive SMEs under the separate Enhanced R&D Intensive Support, or ERIS, regime. While simplification and clarity was one of the policy objectives, construction businesses are experiencing the opposite in many ways. 

The sector’s layered contractual structures, extensive subcontractor networks, and overlapping technical and financial responsibilities mean eligibility can be significantly more complex than before. 

Why construction is disproportionately affected by the merged RDEC scheme 

Historically, the treatment of subcontracted or contracted-out R&D depended mostly on which scheme applied. Under the SME scheme, subcontracted R&D was already a recognised category of qualifying expenditure, subject to specific restrictions. Under the legacy RDEC regime, by contrast, subcontracted R&D was generally more limited.

The merged RDEC scheme changes the analysis by introducing a statutory  contracted-out R&D framework that is now central to determining which party is entitled to claim. The focus is therefore not simply on who performed the technical work, but on

• whether the R&D has been contracted out,
• by whom, and
• whether the customer intended or contemplated R&D of that sort when entering into the relevant contract.

HMRC guidance states that the general rule is that only the party taking the decision to undertake or initiate the R&D will be able to claim. 

For construction, this matters because its typical supply chain structure is not vertically integrated. Projects are often delivered through multiple tiers of contractors, consultants and specialists, meaning innovation is rarely delivered linearly. That creates practical uncertainty over who intended or contemplated the R&D, who controlled the technical response, and who is entitled to claim. HMRC’s contracted-out R&D guidance makes these questions central to the analysis.

Example 1: Customer-led technical challenge

A tier 1 contractor may commission a specialist façade contractor to solve a complex thermal performance issue. This example matters because the claim position may turn on whether the tier 1 contractor intended or contemplated that R&D would be required when it engaged the specialist, or whether the specialist independently developed the solution as part of delivery.  

Example 2: Specialist-led technical response 

A geotechnical engineering subcontractor may develop a bespoke foundation solution in response to unforeseen site conditions. This example matters because, where the technical uncertainty only emerges during delivery and was not intended or contemplated by the customer at contract formation, the specialist may have a stronger argument that it independently undertook the R&D. 

Example 3: Fragmented design responsibility

A design-and-build contractor may retain design responsibility while outsourcing elements of technical delivery. This example matters because contractual design responsibility, technical control and actual problem-solving may sit with different parties, making claim entitlement harder to evidence.  

In each case, the issue is not simply which business performed the technical work. The key question is whether the R&D was contracted out, who intended or contemplated it at the outset, and who was responsible for resolving the uncertainty in practice.  

Relief rate changes across construction subsectors 

While the benefit under the merged RDEC scheme is set at 20%, broadly aligning with the previous RDEC model, the overall financial impact will vary considerably depending on where your business sits in the construction value chain. 

Main contractors 

For larger contractors that previously claimed under the old RDEC scheme, the merged RDEC scheme may present new opportunities that were not available before.  

Under the legacy RDEC framework, subcontracted R&D costs were generally more restricted than under the SME regime. Under the merged RDEC scheme, some contractors may now need to revisit whether payments to third parties fall within the new contracted-out R&D rules. 

However, paying for technical work does not automatically make expenditure claimable. Eligibility depends on contractual fact patterns and whether the R&D was genuinely contracted out in the sense intended by the legislation. 

Specialist subcontractors 

This is where risk becomes most acute. Specialist contractors, such as: 

• geotechnical engineering firms  

• M&E contractors  

• façade engineering specialists  

• structural engineering subcontractors  

have historically been able to claim where they were directly solving technical challenges. 

Under the merged RDEC scheme, however, their position may be significantly weakened if they are simply executing a tightly defined scope specified by the client. 

The core distinction becomes: were they independently leading/determining the technical direction, or merely delivering against an instruction? 

Design and build contractors 

For design-and-build firms, the impact varies. Where the contractor retains genuine design responsibility and is actively developing technical solutions, eligibility may remain strong. 

However, where innovation responsibilities are fragmented between client teams, consultants, and subcontractors, determining ownership becomes more complex. 

Engineering consultancies 

Engineering consultancies embedded within construction groups may be in a comparatively stronger position. 

Where the consultancy defines the technical methodology, develops the design response, and independently resolves uncertainty, the argument for ownership is often clearer. 

This is especially true where the main contractor lacks in-house technical design capability. 

Upstream vs downstream contracts: who owns the R&D now? 

This is likely to be the most commercially important issue for construction businesses. Under the merged RDEC rules, eligibility for contracted-out R&D depends on multiple factors, including: 

• whether a contract exists  

• whether R&D forms part of the contractual arrangement  

• whether the claimant intended or contemplated R&D of that sort to be undertaken 

The final point introduces significant uncertainty. How do you evidence intention? 

In practice, HMRC scrutiny is likely to extend beyond simple contract wording into surrounding commercial circumstances, such as: 

• who bore the financial risk  

• who controlled technical decision-making  

• whether the contractor acted autonomously  

• ownership of resulting IP  

• the commercial purpose of the engagement  

Example 1: Developer-led innovation 

A developer commissions a contractor to deliver an innovative energy-efficiency solution, specifying clear performance requirements and directing technical outcomes. In this scenario, the developer is more likely to have the stronger claim position. 

Example 2: Specialist engineering autonomy 

A contractor engages a geotechnical specialist to deliver a foundation package. During the project, unpredictable ground conditions arise, and the specialist independently develops a bespoke piling methodology. 

In this case, the specialist may retain the stronger claim position where the need for R&D was not intended or contemplated by the customer at the outset, and the specialist independently identified and resolved the technical uncertainty. This is particularly relevant where the R&D is incidental to delivering the contracted works, rather than something the customer specifically required or expected to be undertaken. 

Example 3: Design responsibility clauses 

A design-and-build contract includes broad innovation obligations, but technical design authority sits partly with the client’s appointed consultants. 

Here, claim entitlement may become contested. The contract may suggest that the design-and-build contractor carries responsibility for technical delivery, but the surrounding facts may show that key technical decisions were controlled, directed or approved elsewhere. In that scenario, the analysis will need to identify which party initiated the relevant R&D, what was contemplated at contract formation, and who was responsible for resolving the technical uncertainty in practice. 

This is why contractual ambiguity now creates genuine financial exposure; the same technical work may support different claim positions depending on what was expected at the outset, how the contract allocated responsibility, and how the project was actually delivered. 

Financial impact: beyond tax relief 

For businesses that previously claimed under the SME scheme, the merged regime may change how R&D relief is recognised and discussed internally because the credit follows an RDEC-style above-the-line model. For businesses that already claimed under RDEC, this accounting treatment will be familiar; the more significant financial impact is likely to come from changes in claim entitlement, contracted-out R&D analysis and overseas cost restrictions. 

For finance teams in former SME claimants, this may increase the visibility of R&D incentives in financial reporting and commercial planning. But across the construction sector, the larger issue is that the merged regime can change which party is entitled to claim, creating both downside risk and missed opportunity. 

• Margin pressure: Construction margins are often narrow. If claim entitlement shifts upstream unexpectedly, specialist contractors may lose benefit that was effectively factored into pricing assumptions. This can materially affect project economics and may reduce the incentive for specialist contractors to develop innovative solutions. 

• Unclaimed expenditure: Conversely, some larger contractors may be missing legitimate opportunities because they are still applying legacy assumptions. Businesses that previously dismissed subcontracted innovation costs may now have claim potential, provided the statutory conditions for contracted-out R&D are met. 

• Investment decisions: If businesses cannot confidently determine whether technical expenditure qualifies, investment decisions may become more conservative. 

The practical point is that the merged regime is not just a rate or reporting change. It can alter project economics depending on where the R&D sits in the contractual chain and which party can evidence entitlement to claim. 

What construction businesses should do now 

1. Review contract wording 

Contracts should reflect the real allocation of technical responsibility. Blanket clauses assigning all R&D to one party are unlikely to be decisive if the wider facts tell a different story. Businesses should use specific drafting that identifies expected technical uncertainty, responsibility for resolving it, control over methodology, risk allocation and treatment of resulting IP or know-how. Legal and tax review may be essential. 

2. Assess R&D ownership at tender stage 

Where innovation is expected as part of project delivery, ownership questions should be addressed during bid and negotiation phases. Waiting until claim preparation is too late. 

3. Re-model financial impact 

Historical assumptions may no longer hold. Businesses should reassess: 

• effective benefit rates  

• claim ownership scenarios  

• project pricing assumptions  

• innovation ROI  

4. Review both upstream and downstream contracts 

Eligibility analysis now works in both directions. Construction businesses need visibility not only into what they deliver, but also what they commission. 

5. Prepare for greater scrutiny 

Contracted-out R&D is likely to become an area of enquiry focus. Evidence quality, technical narrative, and contractual interpretation will all matter. 

How Ayming helps construction businesses respond 

Beyond technical documentation, construction R&D claims now require a more complex analysis across functions and contracts. 

Ayming combines sector-specific construction expertise with specialist R&D tax knowledge to help businesses identify defensible opportunities under the merged RDEC scheme. Our teams include experienced technical specialists who understand how innovation occurs in real construction environments. 

Using proprietary technology including Ayming Advance and secure contract assessment tools, we can rapidly analyse complex contractual arrangements while applying expert human review to assess eligibility with confidence. 

Whether you are a main contractor, specialist subcontractor, design-and-build firm, or engineering consultancy, the key question is no longer simply “Did we do R&D?”  

It is “Can we prove we own it?”