Get prepared for the R&D Tax merged scheme

The merged R&D scheme (effective for APs beginning on or after 1^ST April 2024) has brought about seismic changes to how R&D tax claims are made. Effective for accounting periods beginning on or after 1^ST April 2024, the new scheme brings with it new rules, regulations and rates which will impact companies seeking to claim R&D tax. This blog explores the key changes as well as the impacts they will have on companies claiming R&D tax in this new era.

Firstly, let’s start with, Why?

In short, after years of scrutiny about the levels of fraud and error associated with R&D, the new scheme aims to:

• bring much-needed simplification to the R&D landscape by merging the SME and RDEC schemes.
• dramatically reduce widespread error and fraud.
• provide enhanced relief for R&D intensive SMEs (read my other blog on this, here)

Better Rate than Never: Merged Scheme Rate Changes

The merged scheme introduces a unified rate of relief, simplifying the process for businesses. Previously, SMEs and large companies claimed different rates. The merged scheme has a single rate of 20% above-the-line credit. Previously, under RDEC this was 13%, so long-term RDEC claimants will be happy with this increase (and long-term SME claimants, not so much). The new rates mean that after tax, based upon a corporation tax rate of 25%, the benefit will be 15% of a company’s qualifying R&D expenditure. Or, if a company pays the lower rate of corporation tax, which is 19%, then the post-tax benefit is 16.2%

To illustrate these numbers, £100,000 R&D expenditure at the 20% rate = £20,000. This £20,000 sits as a taxable income in the company’s profit and loss account. If a company is paying 25% corporation tax (highest), it will pay £5,000 in tax, and the remaining sum will be £15,000 (15%). If the company is subject to the lower tax rate of 19%, it will pay £3,800 in tax and the remaining sum from the £20,000 R&D expenditure credit will be £16,200 (16.2%)

For SMEs who are loss-making and spending a high proportion of their overall company expenditure on R&D, there is another shiny new scheme (the Enhanced R&D Intensive Scheme = ERIS) which has a potential tax benefit worth up to 27%.

PAYE CAP

The amount of the PAYE cap for claims under both the merged scheme and ERIS is £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities. Under the merged scheme, the PAYE cap (where applicable) limits the amount of payable credit a company can receive in the accounting period for which you claim. Any excess over the cap is carried forward and treated as an amount of Research and Development expenditure credit to which the company is entitled for the next accounting period.

Under the ERIS scheme, any claim for tax credits which exceed the cap is invalid. If the company is exempt, the PAYE cap does not apply. More information about this is in CIRD90600

What can and cannot be claimed under the merged scheme?

Alongside the rates, there are other changes which impact what can and cannot be included in an R&D tax claim under the merged scheme. Remember, all of this comes into play for AP beginning on or after 1^st April 2024.

Subsidised Expenditure and Contracted Out R&D

Firstly, unlike the previous SME scheme (pre-April 2024) there isn’t a restriction on claiming subsidised expenditure. So R&D projects which are funded (in part or full) from external sources, such as grants or commercial contracts can be claimed for under the merged scheme (as long as it was the claimant who initiated or ‘contemplated’ the R&D project (unsure what this means? Read this blog). Likewise, companies can now also claim for the costs of contracting out their own R&D but will need to demonstrate that they intended or contemplated that R&D would need to be done.

Overseas R&D Costs

Under the merged scheme, there are new restrictions on payments made to contractors and EPWs for R&D where the R&D activity takes place overseas. For payments made to contractors, the restriction in the legislation applies based on the location of the R&D activity. Whereas, for EPWs, it applies based on whether the workers are subject to UK PAYE and NIC contributions. There are exceptions to this restriction, where a company can claim for this kind of overseas expenditure, however, certain conditions must be met.

• The conditions necessary for the R&D are not present in the UK.
• The conditions are present in the location where the R&D is undertaken.
• It would be wholly unreasonable for the company to replicate the conditions in the UK.

Generally, the claimant company must show that replicating the conditions in the UK would have been wholly unreasonable. In the examples provided, these often relate to geographical, environmental or social factors, or where legal or regulatory requirements mean that that activity needed to take place in specific territories outside of the UK.

To recap, there are important steps that all companies should take the time to consider when claiming R&D tax relief under the new schemes. These are:

• Identifying the correct R&D tax scheme to claim under: either the Enhanced R&D Intensive Scheme (ERIS) or the merged scheme.
• Whether decisions to carry out R&D were initiated by the claimant company.
• Whether it was wholly unreasonable for subcontracted R&D to take place in the UK.

Unsure how any of the above might impact your next R&D tax claim?

To conclude, the introduction of the merged R&D scheme marks a significant shift in the landscape of R&D tax relief in the UK. Embracing innovation and understanding the new R&D tax scheme can help companies not only comply with the new regulations but also unlock significant financial benefits that fuel further research and development, driving growth and success in a competitive market. Unsure how these changes might impact your next R&D tax claim? Reach out to our R&D Tax experts for tailored advice and support in navigating these changes.