Merging Ahead: New R&D Schemes Becoming More Prevalent
The R&D tax relief scheme has undergone several changes in the last few years as HMRC has attempted to ensure that the scheme is delivering value for money to the UK exchequer. One of the major changes announced in 2023 was the intention to merge the two historic schemes, namely SME and RDEC for small/medium and large companies respectively, into one scheme with a single main rate.
In the 2023 Autumn Statement, it was announced that the schemes would be merged, but loss-making SMEs who spent a significant amount of their net expenditure on research and development could still claim at a more beneficial rate under the “ERIS” (enhanced R&D intensive support) scheme.
The two new schemes – merged and ERIS – come into effect for accounting periods beginning on or after 1 April 2024, so the first 12 month accounting periods to fall within the remit of the new schemes are those with a 31 March 2025 year end. As such, claims being made under these two schemes are now starting to become more and more common.
What are the main features of the merged scheme?
The figure that companies will unsurprisingly be the most interested in is the rate of the taxable benefit. Under the merged scheme, a flat credit rate of 20% can be claimed against qualifying expenditure in a relevant period.
It is important to note that this credit is taxable; given that the main rate of tax is now 25%, profitable companies will receive an effective credit of 15% on their expenditure.
There is a rule that allows loss making companies to surrender their “step 2” restriction at the lower rate of 19%; this means that a slightly higher net credit of 16.2% is payable to such companies.
Some other key features include:
- Subsidised expenditure – SMEs who has their R&D expenditure subsidised previously had to claim some or all of their expenditure under the less generous RDEC scheme. Under the new scheme, subsidised expenditure does not affect the R&D claim value.
- Subcontracting rules – the company actually making the decision to undertake and/or controlling the R&D take precedence in claiming rather than being based on who actually pays for it.
- PAYE/NI cap – although the merged scheme rules follow the same credit rules as those that are applied to the outgoing RDEC scheme, the PAYE/NI cap applied at step 3 uses the old SME/new ERIS calculation, which is far more lucrative. As a reminder, this rule allows a credit to be paid up to three times the company’s total PAYE and NI contributions in the period plus a £20,000 minimum for all companies.
Who can claim under the ERIS scheme?
The new ERIS scheme is a much more generous scheme that applies to claimants for periods beginning on or after 1 April 2024. Under ERIS a tax credit can be paid at a rate of up to 26.97%; i.e. this scheme is potentially 66% more lucrative than the merged scheme for some companies. However, as with everything R&D, there are criteria that have to be met:
- The company must be an SME; broadly this means a company (within a wider group if applicable) must have:
- Fewer than 500 staff (full time equivalent); and
- Either turnover not exceeding €100 million or gross assets not exceeding €86 million.
- The company must be making a taxable loss before the R&D enhanced deduction is applied to the corporation tax computation.
- The company’s intensity ratio must either exceed 30% or the company must have been deemed R&D-intensive in the previous period. The R&D intensity is broadly the amount of expenditure incurred on R&D as a percentage of total expenditure, taking into account the R&D expenditure and total expenditure of any connected companies.
How can YesTax help?
Given the complexity of claiming R&D tax relief, it is worth using a reputable adviser when compiling an R&D tax relief claim to ensure that you are eligible to claim, you are claiming under the correct scheme and you are providing sufficient information to HMRC both in terms of quantity and quality.
YesTax can help you with the following:
- Reviewing R&D activity and expenditure eligibility.
- Assessing and calculating the R&D intensity ratio.
- Ensuring that subcontracting arrangements and subsidised expenditure are properly documented.
- Ensuring that, where required, you have complied with the “Advanced Notification” requirements that entitle you to make a claim in the first place.
If your business conducts R&D, now is the time to review your tax position and plan your claims under the new rules.
To ensure you obtain your full entitlement to R&D tax incentives, get in touch at hello@yes.tax.
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