All About the New Merged R&D Tax Relief Scheme

The Government plans to consolidate the existing SME and RDEC R&D schemes into a single above-the-line credit scheme, largely mirroring the current RDEC scheme, with a headline relief rate of a 20%.

Under the current RDEC scheme, loss-making companies face a notional tax at the corporation tax main rate, which is presently 25%. The upcoming changes will decrease this rate to 19%, thus increasing the RDEC cash benefit for these companies. As a result, the net RDEC benefit for loss-making companies will be up to 16.2% for every £1 spent on qualifying R&D, in contrast to 15% for profitable companies.

However, the revised scheme's rates are less advantageous for SMEs. These new rates are lower than those offered by the existing SME scheme, which provides benefits ranging from 18.6% to 21.5% for expenditures incurred from 1 April 2023, based on whether the SME is loss-making or profitable.

The decision to combine the SME R&D tax credit scheme with the RDEC scheme is influenced by multiple considerations:

A supplementary programme aimed at R&D-intensive SMEs will be available in addition to the primary, consolidated scheme for expenditures incurred starting April 1, 2023. This programme provides enhanced relief rates for certain loss-making SMEs, offering a cash benefit of up to 26.97% for each qualifying R&D pound spent.

Initially, it was declared that a company would qualify as R&D-intensive if its R&D expenditure constituted 40% of its total deductible expenditure within a given period. However, the Government announced in the Autumn Statement that this intensity threshold will be lowered to 30% for accounting periods starting on or after April 1, 2024. This adjustment is expected to make an additional 5,000 UK companies eligible for enhanced relief rates.

To safeguard the R&D-intensive scheme for genuinely loss-making, R&D-intensive companies, the Government has introduced new rules that include a one-year grace period. This grace period applies if a company falls below the 30% threshold in the subsequent accounting period, ensuring stability for claimants whose spending varies annually. Additionally, anti-avoidance measures will be implemented to prevent businesses from manipulating their intensity by using short accounting periods

The new scheme differs from the existing RDEC scheme in several keyways, particularly where elements of the current SME scheme have been integrated.

Businesses presently claiming RDEC should note the following points:

• PAYE/NICs: The new legislation incorporates the more generous payable credit cap from the current SME scheme.
• Overseas R&D: The previously postponed restrictions on relief for overseas expenditures on externally provided workers (EPWs) and subcontracted R&D are now included.

The Autumn Statement brought some much-needed clarity, which was further detailed in the Finance Bill 2023-2024. It clarified that under the merged scheme, the party deciding to conduct the R&D and assuming the associated risks should receive the benefits of the claim.

The Finance Bill 2023-2024 specifies that if a contractor is required to perform R&D activities to fulfil a contract, this will be considered contracted-out R&D. In this scenario, the expenditures for the contracted-out R&D would qualify for the person who outsourced the R&D. However, there could be exceptions where the activities don’t qualify as part of an R&D project and are instead initiated by the contractor.

Determining whether R&D has been contracted out will depend on the specific contract terms and factual circumstances. This highlights the importance of thoroughly reviewing and understanding contracts before starting work to ensure potential benefits are not overlooked.

The Finance Bill 2023-2024 intends to eliminate the existing subsidized expenditure provisions for the SME scheme (including those proposed for the merged scheme), which currently cover costs met directly or indirectly by another party.

This change will affect both the updated SME intensive and the merged scheme, benefiting companies that receive grants or other third-party funding. 

With significant changes incoming for R&D claims – including adjustments like the extension of data and cloud computing expenditure and restrictions on overseas expenditure – it is crucial for companies to review their R&D claims. This involves reassessing the methodology used and forecasting the expected benefits. Here's a comprehensive guide to help your company prepare for these changes effectively.

-  Understanding the New Merged Scheme:

The upcoming merged scheme mechanism for relief could pose operational challenges, particularly for those unfamiliar with the Research and Development Expenditure Credit (RDEC) scheme. Key steps to prepare include:

• Engage with Experienced Advisers: It's essential to collaborate with advisers who have a history in preparing RDEC claims. Their expertise will be invaluable in navigating the new scheme.

To align with the new regulations, companies should:

• Reevaluate R&D Claim Methodologies: Ensure that your current methodologies are compliant with the new scheme and adjust them if necessary.
• Forecast Expected Benefits: Use historical data and the new regulations to project the benefits you expect to receive under the new scheme.

Preparing for the SME Intensive Scheme:

• Maintain Historical Evidence: Keep detailed records of qualifying expenditure to meet the relevant intensity thresholds.
• Review Third-Party Contracts: Examine any agreements with third parties to understand the impact of the contracted-out rules.

Government Guidance and Support

• Given the short timeline until the merged scheme is implemented, businesses need clear and timely guidance from the Government. To prepare:
• Stay Informed: Regularly check for updates and guidance from the Government on the new scheme.
• Seek Clarity: Don't hesitate to ask for detailed explanations from regulatory bodies or your advisors to ensure your understanding is accurate.

Effective preparation for the incoming R&D changes requires a thorough review of your current methodologies, initiative-taking engagement with experienced advisers, and close attention to Government guidance. By taking these steps, your company can navigate the changes smoothly and ensure compliance.

For more insight and guidance on preparing for these changes, please get in touch with our team of experts at Easy R&D.