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 will impact companies in different ways. To find out how it might effect your business, contact us.
The merged scheme continues 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 follows 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 new merged RDEC scheme. 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, detailed here Overseas restrictions under the new merged RDEC scheme.
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.
