New Merged R&D Tax Expenditure Credit Scheme – FAQs

What is the new Merged R&D Expenditure Credit Scheme?

  • The Merged R&D Expenditure Credit Scheme replaces the old SME Tax Relief and R&D Expenditure Credit (RDEC) schemes.
  • The scheme comes into effect for accounting periods beginning on or after 1 April 2024.

What benefits are available?

  • Companies can claim a credit at the rate of 20% of qualifying R&D expenditure.
  • The full credit can be used to offset the company’s corporation tax liabilities for the year.
  • Any unused credit is:
    • receivable in cash, subject to a PAYE/NI-based cap;
    • available for offset against corporation tax liabilities for any other accounting period;
    • available for group relief;
    • available for offset against future tax liabilities.

A separate benefit for R&D Intensive SMEs

Like the SME Tax Relief Scheme, loss-making R&D intensive SMEs can claim an enhanced deduction of 86% on qualifying costs. Under this scheme, (Enhanced R&D Intensive Scheme or ERIS), the cash credit rate is 14.5% rather than the current SME cash-back rate of 10%.

What is R&D intensity?

Broadly, the R&D intensity criteria is met where the SME’s qualifying R&D expenditure is at least 40% of its tax-deductible expenditure for the year (30% for periods starting on or after 1 April 2024).

What costs can I claim?

The cost calculations are the same under the Merged and ERIS schemes. Eligible cost categories comprise:

  • Staffing costs.
  • Costs of externally provided workers (“EPW”, i.e contractor personnel).
  • Costs of contracted-out R&D.
  • Consumable items including water, fuel and power.
  • software licences.
  • Costs of data licences and cloud computing.
  • Payments to the subjects of clinical trials.

What are the key changes between the Merged Scheme and previous SME and RDEC schemes?

  • The new merged scheme provides a credit of 20% to all companies (unless claiming under ERIS).
  • There is no restriction on claiming for grant-funded/ subsidised expenditures (which are disallowed under the current SME Tax Relief Scheme, although claimable under the RDEC scheme).
  • The costs of EPWs and Contracted-out R&D are restricted to activities undertaken in the UK. However, exceptions apply, so do consider these.
  • Further, for contracted-out R&D, the general rule is that the claimant (rather than (sub)contractor) can claim for these costs (previously disallowed under the RDEC scheme). There are however certain important conditions that must be met.
  • A key point is that the claimant will have to demonstrate (within its contractual documentation or other internal reports) that it is their R&D and the company’s competent professionals have considered the scientific/technological Advances they are seeking to achieve and the scientific/technological uncertainties they contemplate facing, as part of this R&D work. Failure to do so will disqualify these costs from the claim, despite the claimant paying for the subcontracted R&D work.
  • Payments made to qualifying bodies (qualifying costs under the RDEC scheme) no longer exist as a qualifying cost category.

Summary

Whilst the aim was to simplify the R&D Tax Incentive schemes, the rules around claimable EPW and Contracted-out R&D can be quite nuanced and will require careful considerations and judgments to be made. It will also be important to ensure sufficient records are maintained to support these judgments.

For further information on how these changes impact your claims, do get in touch with us.