2023’s Autumn Statement delivered by the Chancellor Jeremy Hunt, confirmed that the two R&D tax credit schemes (SME and RDEC) will be combined to form a new merged R&D scheme. This merged scheme R&D expenditure credit will apply to accounting periods beginning on or after 1 April 2024 and will not discriminate based on the size of the business, both SMEs and large businesses will claim under the same scheme and at the same above-the-line credit rate of 20%.
The HMRC guidance for the merged scheme is still being finalised and will impact companies in different ways. To find out how it might effect your business, contact us.
The merged scheme will continue with largely the same assessment criteria, to have a qualifying R&D project the project must satisfy three conditions:
As explained above, the merged scheme will follow the RDEC payment model of an above-the-line expenditure credit at a rate of 20% for most businesses. However, the UK Government wants to reward the most R&D intensive businesses and incentivise those on the cusp of being R&D intensive to reach that threshold. Therefore, there is a second ‘scheme’ or ‘rate’ for loss-making R&D intensive businesses, called the Enhanced R&D Intensive Support (ERIS) scheme, that follows the previous SME calculation at a 14.5% rate. The threshold to meet the R&D intensity condition is at least 30% of a company’s total expenditure to be related to R&D.
The previous SME scheme penalised businesses that received a form of subsidisation to offset the costs of their R&D project(s), perhaps in the form of grants or other funding. This limitation will be removed from the merged scheme, businesses with subsidised R&D projects will be able the full amount entitled to them should they meet the existing rules of the scheme.
2021’s Autumn Budget saw Rishi Sunak announce the UK’s R&D reliefs will be focused to limit benefit to R&D done in the UK. This will be in force as part of the merged scheme. The idea behind this is to encourage the use of UK workforce and, in the long term, boost skills and jobs in the science and technology sector. Therefore, as a rule of thumb, overseas R&D costs will not be qualifying R&D expenditure under the merged scheme. However, there are exclusions to this rule in the form of a three-step test, should a claimant be able to satisfy all steps, the related overseas costs may be eligible:
HMRC sets out two main condition categories that may deem overseas expenditure allowable:
Draft guidance explains that this list is not exhaustive and states that a valid condition may fall under both the above conditions or neither the above conditions. This gives the impression that HMRC are understanding of the complex situations likely to be at play and will be willing to hear a claimant make their case based on their specific circumstances.
HMRC set out two conditions excluded from meeting the allowable overseas expenditure test, these are:
The draft guidance explains that if either the cost of carrying out the R&D activity or the availability of workers are the main reason or the only reason for contracting out overseas, the expenditure will not qualify. Claimants are likely to need show evidence of this should the claim go into enquiry.
In November 2023, HM Treasury set out a technical note clarifying that in the merged scheme rules, the entity contracting out the R&D (customer) would be the entity eligible to claim R&D relief, not the subcontractor. The reasoning behind this principle is that it allows the company making the decision to do the R&D and bearing the financial risk to claim R&D relief.
For more detailed guidance, see New rules regarding contracted out R&D when claiming R&D tax relief.
