The UK’s R&D tax relief regime has experienced its biggest shakeup in years. Instead of separate schemes for SMEs and large companies, there is now a single merged R&D scheme. The change will impact everyone who plans to claim R&D Tax Credits for accounting periods starting on or after 1 April 2024.
In practice, this means that the rates for R&D tax relief have changed so that they’re akin to the previous RDEC scheme for both profit-making SMEs and large companies, but there are other important changes that businesses should familiarise themselves with.
In this article, we explain everything you need to know about claiming under the merged R&D scheme.
What is the merged R&D scheme?
The merged scheme, also known as the merged R&D expenditure credit (RDEC), rewards innovative businesses for R&D projects that seek to make an advance in science or technology (including mathematical advances). This might include improving an existing product or service or inventing a new one. An advance can also result in a new discovery that increases our overall knowledge in a field of science or technology.
To qualify, projects must tackle an uncertainty that a competent professional couldn’t work out for themselves. This means demonstrating that the solution wasn’t obvious and required systematic experimentation to overcome challenges. With a qualifying project, businesses can claim a credit on expenses such as staff remuneration, consumables, software, data licences, cloud computing and other R&D-related spend. You can find out more by reading our article on what qualifies as R&D expenditure for claiming tax relief.
When does the merged R&D scheme start?
The new merged R&D scheme applies to the accounting periods that begin on or after 1 April 2024. Therefore, companies will start taking advantage of the scheme at different times depending on their tax year.
For example, companies with a year-end of 31 March 2024 will first use the new scheme for their accounting period ending 31 March 2025. Companies with a year-end of 31 December 2024 will first use the new scheme for their accounting period ending 31 December 2025.
What are the rates for the merged R&D scheme?
The merged R&D scheme offers a 20% “above the line” credit on qualifying R&D expenditure for both profit-making SMEs and large companies, which is taxable as trading income.
A company’s final benefit will depend on their qualifying expenditure and corporation tax rate. Example benefits calculations are as follows:
| Main rate CT (profits over £250,000) | Small profits rate CT (profits under £50,000) |
|---|
| Qualifying R&D Expenditure | £100,000 | £100,000 |
| Merged Scheme RDEC Rate | 20% | 20% |
| Merged Scheme RDEC Tax Credit | £20,000 | £20,000 |
| Corporation Tax (CT) Rate | 25% | 19% |
| Net Benefit (Tax Saving) | £15,000 | £16,200 |
Support for loss-making R&D intensive SMEs
The government also offers enhanced intensive support for loss-making R&D intensive SMEs (ERIS). SMEs are considered to have a high R&D intensity if their research and development covers 30% of their expenditure for accounting periods beginning from 1 April 2024.
Qualifying SMEs can receive a non-taxable credit of up to 14.5% and an extra deduction on their qualifying R&D costs.
The government offers a one-year grace period to prevent companies from losing R&D tax relief due to temporary dips in R&D intensity. So, if a company meets the R&D intensity threshold and claims support in one year but falls short the following year, it can still claim the benefit for that year.
If they choose, eligible R&D intensive SMEs can claim under the merged R&D scheme however, they cannot claim through both schemes for the same project expenditure.
There are separate rules for SMEs based in Northern Ireland.
How does the merged R&D scheme compare to the previous SME and RDEC schemes?
While the new merged scheme is similar to the previous RDEC scheme, there are some key changes, which we have listed below.
New rules for subcontracted R&D
There are new rules for subcontracted R&D. Now, it’s just the company that has commissioned the research and development work that can claim the tax relief (i.e., the customer and not the contractor).
Subcontractors can, however, still claim relief in certain situations, such as in-house R&D unrelated to a customer contract, or if the customer cannot claim (e.g., if they’re a UK government department or an overseas company that doesn’t pay UK Corporation Tax).
Restrictions on overseas R&D expenditure
To ensure that relief is benefiting (and therefore stimulating) UK-based innovation, there’s a new ban on claiming for overseas R&D costs with certain specific exceptions, taking effect for accounting periods starting from 1 April 2024.
It’s still possible to claim R&D relief for work done outside the UK if it’s not possible for the R&D to be done in the UK or if replicating the necessary conditions would be wholly unreasonable. You can find out more by reading our article on qualifying overseas expenditure (QOE).
Simplified rules around subsidised expenditure
The rules around subsidised expenditure have essentially been removed, which means that companies with subsidised or grant-funded R&D projects may now be eligible for relief through either the merged scheme or ERIS.
Externally provided worker (EPW) restrictions
Any costs for externally provided workers (EPWs) will now only be eligible for R&D relief if they are UK workers paid through a PAYE scheme.
Removal of the qualifying bodies list
Companies claiming under the previous RDEC scheme could only contract out research to a limited list of qualifying bodies, but this list is being removed under the new merged R&D scheme, as it was deemed too complex by the government.
Adoption of the SME scheme’s PAYE and National Insurance Contributions (NIC) cap
The merged scheme adopts the more generous PAYE and National Insurance Contributions (NIC) cap from the SME scheme. As a result the cap will be higher so fewer companies will be likely to exceed the cap.
The PAYE cap includes 300% of the business’s relevant PAYE and NIC liabilities plus £20,000. If the R&D Tax Credit exceeds this cap, the business can carry the excess forward as a credit that can be claimed in the following accounting period.
Why was the merged R&D scheme introduced?
The government is trying to make sure that R&D tax relief is used to support genuine, impactful research and development that helps to drive and grow the UK economy.
While much has been done to tackle the abuse of R&D Tax Credits, the SME scheme has always experienced a higher rate of error and fraud. Not only this, the RDEC scheme was generally seen as more effective as HMRC reviews have shown that it has generated more private R&D investment per pound of government spend.
There has also been the stated aim of trying to achieve “tax simplification” with a single relief scheme – although this hasn’t yet been achieved as there are still two schemes (ERIS & the merged R&D scheme).
How to prepare a merged R&D scheme claim
To claim R&D Tax Credits, companies must prepare a detailed technical report that clearly outlines how R&D projects meet HMRC’s strict criteria.
The best way to prepare for this is always to document all R&D-related plans and activities. It’s best practice to keep records of R&D project work regardless of if activity has been a success or failure. Examples of records might include project plans, technical documents, meeting minutes, receipts for consumable materials, and staff time logs.
How Leyton can help
There’s more to claiming R&D Tax Credits than preparing a list of expenses. A strong R&D claim needs to tell a clear story that explains how your research and development efforts have addressed uncertainties and unknowns within the project, and how your solution goes beyond what’s already available in the public domain. This is where our experts can help.
We offer the knowledge and support needed to help your business effectively claim R&D tax relief, ensuring that you receive the full tax relief benefit that you’re entitled to. We have a dedicated team of tax and technical specialists who will work with your team to identify eligible expenses. We’ll handle all the paperwork including your technical report and claim application, and ensure full compliance with HMRC’s strict rules.
We’re also a member of HMRC’s consultative committee, which means that we’re at the forefront of R&D tax legislation changes. If you have any questions about how the new rules will affect your R&D Tax Credits claim, you can speak to one of our specialists today.
If you enjoyed this article, you might also like:
