What is the merged R&D Scheme and who will it impact?

The merged R&D tax scheme in the UK refers to the consolidation of two separate schemes: the R&D tax relief scheme for SMEs (Small and Medium Enterprises) and the RDEC (Research and Development Expenditure Credit) scheme for larger companies.

If you’re currently claiming R&D tax relief, the introduction of the merged scheme will likely impact you. While the aim is to streamline R&D tax relief by merging the previous SME and RDEC schemes, it’s essential to recognise that discrepancies still exist, depending on your business type and the contractual agreements governing your R&D activities.

For SMEs, it’s crucial to determine whether you fall under the R&D Research Intensive incentive or the new merged scheme. To qualify as an SME for R&D tax purposes for the Research Intensive scheme, your company must have fewer than 500 employees and either an annual turnover of no more than €100 million or gross assets not exceeding €86 million. They must also have more than 30 or 40 percent of total spend on R&D, and must be cashing in losses. 

Additionally, you should assess whether the responsibility for R&D lies within your business or elsewhere in the supply chain. Generally, companies may not be eligible to claim if R&D has been outsourced to them, unless they can demonstrate who contemplated the R&D.

When will the merged R&D Scheme be introduced?

The merged R&D tax relief scheme will come into effect for accounting periods starting on or after 1st April, 2024. It’s crucial to clarify that this change may not affect expenditures incurred from the beginning of April.

For instance, a company with a financial year-end on 31st December will experience the transition into the merged scheme when considering an R&D claim for its accounting period beginning 1st January 2025. However, a business with a financial year ending in March will transition for its accounting period beginning 1st April, 2024.

This transition simplifies matters for businesses, eliminating the need to navigate different regimes for accounting periods spanning 1st April, 2024. It is important to note that some businesses will implement the merged scheme later than previously anticipated, as a result of the commencement date.

How will it be different to the RDEC scheme?

The merged scheme presents several deviations from the existing RDEC scheme. These are where elements from the current SME scheme can be seen. The most obvious difference are the regulations concerning contracted-out R&D. Businesses that currently claim RDEC should take note of the below:

1. PAYE/NICs

The legislation of the merged scheme incorporates the more advantageous version of the payable credit cap, as outlined in the current SME scheme.

2. Overseas R&D

Previously deferred restrictions on relief for overseas expenditures on EPWs and subcontracted R&D have been included.

3. Subcontracted R&D

As a general rule, companies cannot claim RDEC if they’ve outsourced their R&D work. However, if a company with a valid R&D project hires a third party to conduct R&D on its behalf, it can claim the eligible costs for that work.

While resembling the SME scheme, the legal definition of contracted out R&D is new, meaning it’s important businesses carefully assess their position in supply chains to ascertain their status under the consolidated scheme. Large companies must assess how the new regulations affect their commercial arrangements and contracts. SMEs continue to face uncertainty regarding claiming R&D tax relief for outsourced R&D, with the new rules adding further ambiguity.

Businesses currently claiming RDEC for R&D conducted for them are unlikely to qualify under the merged scheme, as these costs will be part of the claim for the contracting company.

With this in mind, there are some exceptions where subcontractors can still claim R&D tax relief. For instance, if a company conducts R&D for a contractor that isn’t subject to taxation, such as charities, universities, scientific research organisations, or overseas entities.

4. Subsidised Expenditure

If your R&D activities are supported by subsidies or grant funding, you will no longer experience a reduction in the available R&D relief, as is currently the case under the SME scheme.

This streamlined approach is a positive development, especially considering the recent debate surrounding HMRC’s interpretation of legislative provisions limiting relief for subsidised R&D expenditure.

5.  Above the line expenditure credit

Another key point to note is that every company, irrespective of its size (excluding R&D intensive SMEs), will be eligible for an above-the-line credit within the merged scheme. This entails a credit that can be used to offset your tax liability or, following certain adjustments, can be paid out in cash to your business.

How can TBAT Innovation help?

TBAT Innovation specialises in helping businesses maximise their potential for claiming Research and Development (R&D) Tax Credits. Here’s how we can assist:

1. Expert Guidance: Our team consists of experienced technical and financial R&D Tax Consultants who understand the intricacies of the R&D Tax Credits scheme. We can guide you through the entire process, ensuring that you identify all eligible R&D activities and expenses.
2. Thorough Analysis: We conduct a comprehensive analysis of your company’s R&D projects to identify qualifying activities and expenditures. This includes technical assessments to ensure that your projects meet HMRC’s criteria for innovation, advancement, and uncertainty.
3. Detailed Documentation: We assist in the preparation of robust technical and financial documentation to support your R&D Tax Credits claim. This documentation is crucial for demonstrating the eligibility of your projects and expenses to HMRC.
4. Maximising Benefits: Our goal is to help you maximise the benefits you receive from R&D Tax Credits. By identifying all eligible activities and expenses and optimising your claim, we aim to secure the highest possible legitimate tax relief for your company.
5. Keeping Up-to-Date: We stay informed about changes in legislation and HMRC guidelines related to R&D Tax Credits. This ensures that your claim remains compliant and up-to-date with current requirements.
6. Efficient Process: We streamline the claims process, saving you time and effort. Our expertise allows us to efficiently manage the entire process from initial assessment to claim submission, reducing the administrative burden on your team.
7. Personalised Service: We understand that every company is unique, so we tailor our services to meet your specific needs. Whether you’re a small start-up or a large corporation, we provide personalised support to help you navigate the complexities of the R&D Tax Credits scheme.

Overall, TBAT Innovation is dedicated to helping businesses like yours unlock the full potential of R&D Tax Credits, enabling you to reinvest in innovation and fuel future growth.