The R&D Merged Scheme: What You Need to Know
The Government R&D tax credits scheme remains a generous incentive for UK companies. However, the rules have changed. The R&D merged scheme has been introduced for accounting periods beginning on or after 1 April 2024.
The new merged scheme significantly changes the R&D tax relief scheme and will impact all companies that claim it. The scheme aims to simplify the incentive and prevent some of its previous abuses.
In this blog, we’ll look at what the new merged scheme consists of, the new rules, who it will impact, the merged scheme rates and when it will take effect.
What is the R&D merged scheme?
The merged R&D scheme combines two previous R&D tax relief schemes, the Small and Medium Enterprise (SME) and R&D Expenditure Credit (RDEC) schemes.
The scheme does not change the core definition of R&D for tax purposes. However, the changes will impact many claimants.
Who will the R&D merged scheme impact?
The changes the merged scheme introduced will undoubtedly affect many new and current R&D claimants.
Your type of business and the contractual arrangements under which you carry out Research and development will affect the extent to which the new merged scheme impacts you.
Unless your business qualifies as an R&D intensive loss making SME (and is eligible for the enhanced R&D intensive support scheme (ERIS)), the merged scheme applies to all claimants regardless of size.
Businesses classed as an SME under the merged R&D scheme
For SMEs, it’s necessary to understand if you claim under the R&D intensive scheme or the merged scheme. To be classed as an SME for R&D tax relief under the merged scheme, you must:
- Have fewer than 500 staff.
- A turnover of no more than 100 million euros or gross assets of no more than 86 million euros.
The merged R&D scheme provides an expenditure credit to companies who:
- Are trading.
- Are chargeable to Corporation Tax.
- Have a project that meets the R&D definition.
Enhanced R&D Intensive Support (ERIS)
The enhanced R&D intensive scheme provides tax relief for loss-making companies (SMEs)
Loss-making companies with accounting periods beginning on or after 1 April 2024 can opt for the ERIS scheme if their R&D expenditures represent at least 30% of their total expenditures.
Those qualifying loss-making SMEs will continue to receive relief through an SME tax credit.
Important Dates for the Merged R&D Scheme
The merged R&D scheme will take effect for accounting periods beginning on or after 1 April 2024.
For example, if your accounting period ends 30 November each year, you will only enter the merged scheme for your accounting period ending 30 November 2025.
For businesses with a 31 March accounting period end, you’ll enter the merged scheme for your 31 March 2025 period. So, companies with March 2025 year-ends will be the first to experience the changes under the new scheme.
How the merged R&D scheme works
Whilst the merged scheme is similar to the Research and Development Expenditure Credit (RDEC scheme), there are some key differences and areas to understand.
Above the line credit
The merged scheme adopts an expenditure credit calculation similar to the RDEC scheme. It is provided as a payable credit, calculated as 20% of the qualifying R&D expenditure.
All sizes of companies (unless you are an R&D intensive SME) will receive this above-the-line expenditure credit under the merged scheme.
This credit can be offset against your company’s corporate tax liability. If Corporation Tax liabilities are discharged, the balance may be paid to the business in cash.
Contracted out R&D expenditure incurred
One of the scheme’s changes concerns contracted out R&D. The subcontracted R&D rules are based on the existing SME scheme rules but include a new legislative definition of contracted out R&D.
If a company has work contracted out by a customer, the contractor must claim relief.
If your company has been contracted by a third party to carry out R&D, it cannot claim tax relief under either the merged R&D scheme or the R&D intensive scheme.
The changes are designed to target R&D tax relief to those businesses that decide (and bear the risk) of carrying out R&D.
The only exception is when your company is carrying out R&D for a non-tax-paying entity (such as universities, charities, or overseas entities).
Subsidised expenditure
If your company receives a grant or subsidy for R&D activity, the relief available will no longer be reduced. This is good news for R&D-intensive, loss-making companies, which may now be able to claim under enhanced R&D intensive support (ERIS).
PAYE cap
Like the SME scheme, the PAYE cap remains at £20,000 plus 300% of a company’s PAYE and NIC liability.
Qualifying costs
The categories for qualifying expenditure remain mostly consistent with the previous schemes. However, they have been expanded to include subcontractor and contractor expenditure incurred.
Overseas restrictions
Overseas expenditure on subcontractors and externally provided workers (EPWs) will generally be disallowed. This is because the scheme is designed to favour R&D activity here in the UK.
The impact on R&D claimants under the merged R&D tax regime
Many companies previously benefitting from the higher SME scheme rates will see a reduction in tax relief under the merged scheme unless they are R&D intensive and loss making.
The contracted-out rules mean that claimants should review all their contractual agreements and project details carefully to ensure they are still eligible.
The changes in overseas expenditure will affect companies that rely on overseas contractors.
Overall heightened scrutiny around R&D claims means businesses should ensure their R&D claims are undertaken by credible R&D tax specialists such as Edwards Accountants. All claims must be fully compliant with the new rules, well documented and robust when under scrutiny from HMRC.
The R&D merged scheme rates
The table below shows the effective rates for companies with accounting periods beginning on or after 1 April 2024.
- Profit-making SMEs can receive up to 16.2% in support through the Merged R&D Scheme.
- Loss-making SMEs are eligible for a fixed rate of 16.2% under the same scheme.
- R&D Intensive SMEs may benefit from enhanced support of up to 27% through the Enhanced R&D Intensive Support scheme.
- Large companies can also claim up to 16.2% through the Merged R&D Scheme.
Preparing for the merged R&D tax scheme
Companies should work with a Research & Development Tax Consultant such as Edwards accountants to prepare the changes to R&D tax relief and the merged scheme in the following ways:
Seek expert help – In the past, many companies have used advisors who have incorrectly submitted claims. At Edwards, our corporate tax consultants can advise you on previous claims and help you prepare for the merged R&D scheme.
Check your eligibility—whether you meet the criteria or the SME intensive criteria and whether your current and future projects qualify.
Review your R&D claims – review methodology, forecasting, etc.
Review your costs – ensure you are not trying to claim for costs not covered now (for example, overseas contractors) and that all your qualifying expenditure incurred is correctly categorised.
Submit advanced notification if required – for companies that have not previously claimed R&D tax relief or those that have not claimed in the last three years, you must submit advanced notification to HMRC within 6 months of the end of the accounting period.
Continue to prepare and submit an additional information form – Claimants for R&D tax relief must also remember that the Additional Information Form (AIF) is required for all R&D Tax Relief claims. The Advanced Notification Form does not replace the Additional Information Form.
Expert guidance and advice on R&D tax relief from Edwards Chartered Accountants
By contacting our R&D tax specialists, you can potentially maximise the amount of tax relief you can claim. We help clients to identify their qualifying activities and expenditure.
Our expert team of accountants in Walsall, ensure that clients receive their maximum incentive, that is robust to HMRC scrutiny. Unlike most accountancy firms, we charge on a fixed fee basis rather than a percentage of the refund received. This generally means our clients pay considerably less for our services.
To find out how we can assist your business with Research and Development Tax Relief, please contact us.
