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Merging R&D tax relief schemes – What you need to know!

The recent Autumn Statement confirmed that merging the R&D tax relief scheme will be effective for accounting periods from 1 April 2024. If you engage in R&D activities, this reform will have significant implications.

In January 2023, the government opened a consultation on the merging of the scheme, a policy paper followed in July, and supporting documentation was published hours after the announcement of the Autumn Statement. This supporting documentation lays out the foundations for the imminent merger of the Small and Medium Enterprise (SME) and Research and Development Expenditure Credit (RDEC) scheme, which will affect every company that claims.

After thoroughly reviewing the supporting documentation, we have analysed the rules in depth. Here’s everything you need to know so far.

merging-of-rd-tax-credit-scheme

The Autumn Statement confirmed the merging of the schemes

Initially termed as a ‘potential merger,’ the Autumn Statement on the 22nd November confirmed the merging of the SME and RDEC tax relief schemes will go ahead. If implemented as scheduled, the merger will be effective for accounting periods on April 1, 2024.

Scheme characteristics

The merged scheme will primarily follow the RDEC rules, emphasising the significance of R&D within a company’s pre-tax income. For larger businesses already claiming through the RDEC scheme, this ‘above-the-line credit’ approach will not entail a significant transition. However, SMEs are advised to start planning for these changes sooner rather than later. Whilst this is the case, elements from the SME scheme are proposed to be incorporated, which could offer more favourable outcomes for all businesses undertaking R&D projects.

If you’d like to discuss this further, contact one of our experts today, who would happily take you through the changes. 

Key Components of the Merged Scheme

      1. Definition of R&D: The core definition, based on guidelines, remains unchanged. Companies must demonstrate that their project aims to make an advance in science or technology.
      2. Rates of relief: A unified relief rate of 20%, with a net benefit of 15%, is proposed, calculated using the main rate of corporation tax. A special relief rate for R&D-intensive companies (up to 27%) would continue alongside the merged scheme.
      3. Loss cap rules: The more generous SME scheme loss cap rules are proposed to be adopted in the merged scheme. For instance, the notional tax rate applied to loss-makers in the merged scheme will be the small profits rate of 19% rather than the 25% main rate set in the current RDEC.
      4. Subcontracted R&D: The scheme would allow for broader claims on outsourced R&D costs, similar to the current SME scheme, with certain restrictions.
      5. Subsidised R&D: Subsidised expenditure rules in the current SME scheme won’t apply to the new merged scheme. This means that if a company receives a grant for their R&D costs, the relief available won’t be reduced.
      6. Overseas costs: A proposed ban on claiming for overseas outsourcing costs is slated to be part of the new scheme.

    R&D tax relief rates

    SME Scheme RDEC Scheme Merged Scheme
    Time scale up to 31/03/2023 From 01/04/2023 up to 31/03/2023 From 01/04/2023 From 01/04/2024
    Profit-making company 130% enhancement = 24.7% net benefit 86% enhancement = 21.5% net benefit RDEC rate 13% = 10.5% after tax RDEC rate 20% = between 14.7% - 16.2% after tax Rate 20% = between 14.7% - 16.2% after tax
    Loss-making company R&D costs plus 130% enhancement = 230 x 14.5% rate = 33.4% credit R&D costs plus 86% enhancement = 186 x 10% rate = 18.6% credit 10.5% 15% 16.2%
    Loss-making R&D intensive company NA R&D costs plus 86% uplift = 186% x 14.5% rate = 26.97% NA NA NA

    Impact on businesses

    The merging of these schemes impacts a wide range of companies involved in R&D activities. Smaller companies may see a reduction in the benefits from R&D relief claims. Additionally, the new rules on subsidised R&D and overseas costs will necessitate careful planning and decision-making for businesses, particularly those receiving grants.

    Preparing for transition

    Businesses, particularly small and medium enterprises (SMEs), must be ready for potential changes. It was expected that the merging of the scheme might be delayed by a year. However, the Autumn Statement confirmed this will not be the case.

    With this in mind, please don’t hesitate to contact us for advice. We can help evaluate the impact and determine any necessary organisational adjustments.

    Government’s stance and policy objectives

    The government’s aim is to support R&D as a driver of innovation and economic growth. The merged scheme is viewed as a step towards tax simplification and effectively using taxpayers’ money. A final decision on the merger is likely to be made in the Autumn Statement.

    Stay informed

    Listen to our latest podcast on the Autumn Statement, where we dive into the impacts of the UK government’s decision to merge the R&D tax relief schemes. Our CEO, Rob Whiteside, provides valuable insights on navigating these changes. Don’t miss out on this opportunity to stay informed about the evolving landscape of R&D tax relief in the UK. Save the date and be part of the conversation.

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