This is intended to simplify the R&D tax incentive scheme process by introducing a combination of the existing enhanced tax relief and payable credits for SMEs and the R&D expenditure credit (RDEC) for larger businesses.
The aim of the new scheme is to provide simplification, consistency and to protect the scheme from abusive claims.
For those who have previously claimed under the SME scheme this represents a considerable change so there is plenty for businesses to consider and plan for in respect of their R&D claims, and claims are likely to fall under more scrutiny than ever before.
The new merged scheme will follow similar principles to the RDEC scheme by way of providing a tax credit of 20% of the qualifying expenditure, which is recognised as deemed trading income of the company before applying Corporation Tax. The company can then use that credit against their liabilities or eventually as cash paid into their business.
This new regime applies to all businesses regardless of their size. The exception is for R&D intensive SMEs (see below) where a more generous scheme will exist in parallel to the new merged scheme.
The merged scheme applies for accounting periods beginning on or after 1 April 2024. This means for a business with an accounting period end of 31 December, they will be under the merged scheme for the year to 31 December 2025.
| Current incentives | Merged Scheme | |||||
| Your business | SME R&D tax incentive | RDEC | Merged scheme | SME intensive scheme | ||
| Company type | Before 1 April 2023 | After 1 April 2023 | Before 1 April 2023 | From 1 April 2023 | From 1 April 2024 | From 1 April 2024 |
| Loss-making SME | Up to 33.35% | Up to 18.6% | 10.5% | 15% | 16.2% | |
| Profit-making SME | Up to 24.7% | Up to 21.5% | 10.5% | Up to 16.2% | Up to 16.2% | |
| R&D intensive SME | Up to 27% | Up to 27% | ||||
| Large company | 10.50% | Up to 16.2% | Up to 16.2% | |||
For the purposes of the former SME scheme, an SME must have fewer than 500 staff, and either a turnover of less than 100m euros or gross assets less than 86m euros.
The proposed changes will mean the tax benefit for SMEs is reduced to 16.2% of their qualifying R&D spend compared to previously larger amounts of up to 33.35%, for loss making companies.
They will need to change how the credit is applied in their tax computations and tax returns. The RDEC credit can also be reflected as an “above the line” credit in the SME’s accounts if they choose to do so.
This is unless they are considered to be an R&D-intensive SME, as explained below.
As an SME, you should consider whether your total qualifying R&D expenditure is 30% or more of your total spend.
If so, the company will be considered one that is ‘knowledge-intensive’ for R&D purposes and may still be able to claim relief under the similar old SME scheme rules.
This is an alternative scheme which will run alongside the merged scheme and will apply to loss-making intensive SMEs only. It provides an effective tax saving of 27% compared to 16.2% for the merged scheme.
It is not compulsory to claim under this scheme and instead companies can still opt for the merged scheme. They cannot claim under both schemes for the same expenditure.
We would expect HMRC to examine these claims with great scrutiny particularly where qualifying expenditure is close to the 30% threshold, so it is advisable that care is taken to ensure the conditions are met.
To explain another change resulted from the merged scheme, it is best presented by an example.
Example
A Ltd undertakes R&D. Their profits, before claiming under the merged scheme, are £25,000. They are considered a small profits company, as their profits are less than £50,000.
Its qualifying R&D expenditure for the year ended 31 March 2024 is £50,000.
They can include an above the line credit of 20% = £10,000.
This increases their taxable profits to £35,000, leading to a corporation tax charge at 19% of £6,650.
To offset this credit, the company must apply the following steps:
Step 1 - Offset the credit against the Corporation Tax Liability for the Accounting Period.
• £6,650 - £10,000 = (£3,350) credit remaining
• If any credit is remaining, go to step 2.
Step 2 - Compare the credit remaining with the ‘net’ amount of expenditure claimed.
• It is the lower of the two figures that is carried down to step 3.
1 The credit remaining = £3,350
2 The ‘net’ amount of expenditure claimed is the figure you have claimed (£10,000) less notional tax of 19% (£1,900) = £8,100
The lower figure here is £3,350.
• The £3,350 is then carried forward to the usual steps under RDEC and either used against other CT liabilities, surrendered to other group members or, as long as the ‘going concern’ condition is met, paid direct to the company.
As you can see, the notional tax restriction that applies when considering the payment of the credit to companies will now depend on whether the company is small profit making. If the company has profits less than £50,000 or has made a loss, a 19% rate will be used, as above.
Under the RDEC scheme it was always assumed that a 25% rate was used regardless of profit levels.
The amount of credit available is subject to a PAYE cap of £20,000 plus 3 x the company's PAYE and NIC liabilities for the year. This can limit the amount of payable credit you can receive in the accounting period for which you claim.
Any excess credit above the cap can be carried forward to the next accounting period.
This is a more generous cap than the one previously applied to the RDEC scheme.
There is no restriction on claiming for subsidised expenditure under the merged scheme or ERIS, unlike what was previously in place for SMEs.
The new scheme and guidance aim to provide further certainty on which company should claim R&D relief where a series of subcontractors are all working to solve the same scientific or technological uncertainty.
The approach has changed so that it is now the party who decides to undertake R&D that is able to make the R&D claim. You can still claim R&D if work has been contracted to you whereby it was your company that took the initiative to do the R&D.
It should be noted however that during the transition, where a contractor or customer is still able to claim for the work they do for you under the old RDEC or SME rules, this claim will not be available to your company.
HMRC have published draft guidance on this area and careful attention is required to ensure a correct claim is made.
Under the previous schemes, there were minimal restrictions on costs for overseas expenditure, which meant they could claim for contractors and EPW’s regardless of where the worked took place.
From April 2024, expenditure on R&D activities that occurred overseas, will generally not qualify for the credit, unless covered under a specific exception. The exception for qualifying overseas expenditure applies if it meets the following three conditions:
The process for submitting the claim has not changed since the new procedure was introduced on 8th August 2023.
If a company has not claimed R&D before, or has not made a claim for the past three years, they will need to inform HMRC in advance by submitting an Advance Claim Notification to HMRC. This must be done no later than six months after the end of the accounting period.
As part of submitting the Corporation Tax return, a mandatory Additional Information Form must be submitted to accompany the claim.
HMRC are currently checking 20% of R&D claims and this is expected to increase as compliance and challenging abusive claims remain a high priority.
Make sure you get your claim right and speak to us as professional tax advisers, to ensure your compliance obligations are met. Get in touch here!
