27 Mar 2024

R&D Tax Claims – Merged Scheme & Sub Contracting changes from 1 April 2024

Ian Davie
Senior Consultant

From the 1 April 2024 the new R&D Tax Merged Scheme will be live, and this is important, for accounting periods starting AFTER 1 April 2024. As way of example here are some company accounting periods and which scheme will apply: 

  • 1 January 2023 to 31 December 2023 – SME & RDEC 
  • 1 March 2023 to 28 February 2024 – SME & RDEC 
  • 1 April 2024 to 31 March 2025 – Merged Scheme 
  • 1 January 2025 to 31 December 2025 – Merged Scheme 

This was to allow for companies’ time to adjust to the new scheme, rather than a straight switch to costs incurred after 1 April 2024. The new Merged Scheme will cover claims by SMEs, Large Companies, and any subsidised projects, which will make the process of claiming simpler. The rates applied are as per the current RDEC scheme, at a rate of 20%, less the corporation tax rate: 

  • Eligible spend is £100k @ 20% less 19% CT gives a benefit of £16,200. 

There are 2 other major changes to R&D claims, both affecting claims periods starting after 1 April 2024, subcontractor/EPW overseas spend and new rules around contracting out R&D and who can claim. 

For subcontracted activity eligible costs will focus on UK spend only, and overseas expenditure will only be allowed under certain specific circumstances, and it is cheaper to do it abroad or availability of qualified staff in the UK are not valid reasons.  

For overseas expenditure to be eligible the criteria that must be met falls into the following categories: 

  • Legal reasons that the R&D activity must be carried out abroad. 
  • For regulatory reasons that the R&D activity has to take place abroad. 
  • Geographical, Environmental, or social reasons, as the purpose of the R&D the conditions do not exist in the UK, which could be a disease, a physical feature (a volcano is typically cited) or animal or plant distribution. 
  • A facility that is required for R&D purposes is not available in the UK, can’t be built in time, would be too expensive to implement or is impractical. 

For eligible EPW (Externally Provided Workers) sited abroad can only be included as eligible R&D spend if the EPW is wholly or partially paid through UK PAYE/NI.  

For contracting out R&D to a third party there is a major shift to account for the decision maker, who contemplated the R&D to be able to claim the cost of the R&D. Previously an SME company could always claim for subcontracted R&D, but a Large Company or SME with a subsided project could not include the subcontract cost in their RDEC claim, regardless of circumstance. Going forward the company, regardless of size or subsidy will be able to claim the cost of subcontracted R&D if they can show they intended for R&D to be carried out.  

If you would like to discuss any of the intricacies surrounding the new R&D Merged scheme and the subcontracting changes, please get in touch today with one of our TBAT R&D tax consultants!

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