I cant seem to merge layers in blender

Every part of the nude body that MD mesh covers should be deleted. In the place that is left you should put the MD mesh's UVs. Putting them in the extra space is a bad idea because many creators do and that can lead to overlapping of textures.
1). In 3D view select everything with A. In UV editor activate sync. Press B to activate box selection and select all MD mesh's UV islands;
2). in 3D view press P and choose Selection to separate the dress from the body;
3). Switch viewport shading to solid to see the wireframe better;
4-5). Select everything that is covered by the MD mesh leaving one loop of vertices at the bottom to prevent holes from appearing in the process of walking;
6). press Delete and choose Faces;
7-8). You can select edges as I did and in the pic and dissolve them;
9-10). Once done, select everything and set the background image. Shift-select the dress, switch to Edit mode, select everything, set the same exact background image. View- Draw other objects to see the body's UVs.
11). S to scale, G to move, R to rotate. S or G followed by Y/X will constrain modifications to the vertical/horizontal axis. R followed by a number will rotate the selection by this number.
Place them like this so that it would not overlap with the body's UVs.