The Merged R&D Tax Relief Scheme: A Guide to Key Changes
The newly merged R&D tax relief regime has introduced significant changes to how businesses claim incentives for research and development expenditure. Effective for accounting periods starting on or after 1 April 2024, the scheme replaces the previous RDEC and SME regimes with a unified structure. Loss-making, R&D-intensive SMEs can continue to benefit from enhanced support under the Enhanced R&D Intensive Support (ERIS) regime.
This article provides a detailed overview of the merged regime, including the key changes, compliance requirements, and actionable steps for businesses.
Contents
Overview of the Merged R&D Regime
The new regime consolidates the old SME and RDEC schemes into a single model designed to simplify R&D tax relief while maintaining a focus on incentivising innovation.
Key Takeaways
- Familiar Framework: Businesses already accustomed to the RDEC scheme may recognise similarities in the mechanism of the new merged scheme, but they must adapt to key updates, such as rules for subcontracted R&D and overseas restrictions.
- Significant Changes for SMEs: SMEs not qualifying for ERIS will face a notable shift in the method and rate of relief under the new regime.
- Review and Prepare: Companies must review contractual arrangements and adjust compliance processes to align with the new rules.
Effective Benefit of the Relief
Under the merged scheme, the government has narrowed the gap between relief for large companies and SMEs, while retaining enhanced support for R&D-intensive loss-making SMEs. The table below summarises the effective post-tax benefit of R&D tax relief under the old and new regimes.
| Old Regimes | New Regimes | |||
|---|---|---|---|---|
| Before 1 April 2023 | From 1 April 2023 | APs starting on or after 1 April 2024 | ||
| Company Type | Net Benefit | R&D Scheme | Net Benefit | |
| SME - Profit-Making | Up to 24.7% | Up to 21.5% | Merged RDEC | 15% - 16.2%* |
| SME - Loss-Making | Up to 33.4% | Up to 18.6% | Merged RDEC | 16.2%* |
| SME - Loss-Making (R&D Intensive) | Up to 33.4% | Up to 26.97% | ERIS | Up to 26.97% |
| Large Company - Profit-Making | 10.5% | 15% - 16.2%* | Merged RDEC | 15% - 16.2%* |
| Large Company - Loss-Making | 10.5% | 15% | Merged RDEC | 16.2%* |
*RDEC is provided as an above-the-line tax credit, which is subject to corporation tax as taxable income. From 1 April 2023, the post-tax benefit received under this regime will vary depending on the taxable profits of the company and whether the main rate of tax (25%) or the small profits rate (19%) applies.
Key Features of the Merged RDEC Regime
Mechanism and Rate
- Tax relief is provided in the form of an above-the-line tax credit, which itself is subject to corporation tax as taxable income. The tax credit is worked out as a percentage of your qualifying R&D costs - the headline rate for this calculation is currently 20%.
-
As noted above, the post-tax benefit of the credit depends on the company’s applicable Corporation Tax rate:
- 25% (main rate): 15% post-tax benefit.
- 19% (small profits rate): 16.2% post-tax benefit.
- A seven-step calculation is used to calculate the tax credit; this amount is offset against existing tax liabilities before any remaining balance is paid as a cash credit.
- The payable credit is capped at £20,000 + 300% of PAYE/NIC liabilities, with exemptions available for certain companies creating/managing intellectual property.
Enhanced R&D Intensive Support (ERIS)
The Enhanced R&D Intensive Support (ERIS) scheme continues to provide vital support for loss-making SMEs heavily focused on innovation and R&D activities.
Key Features
- Intensity Ratio: The scheme is available to SMEs spending at least 30% of their total relevant expenditure on R&D for accounting periods beginning on or after 1 April 2024 (reduced from 40%).
- Loss-Making SMEs: In order to qualify, claimant companies must also make a trading loss for tax purposes before the additional R&D deduction is taken.
- Mechanics: Operates similarly to the old SME relief scheme. Under ERIS, companies can deduct an additional 86% of qualifying costs, to provide a total deduction of 186%.
- Payable Credit: Qualifying SMEs can claim a 14.5% payable tax credit based on surrenderable losses. The tax credit is not liable to tax itself, unlike the RDEC.
- Increased Post-Tax Benefit: Offers a maximum 26.97% post-tax benefit for qualifying SMEs, compared with an equivalent post-tax benefit of 16.2% under RDEC.
- Grace Period: Includes a one-year grace period for businesses temporarily falling below the 30% intensity threshold, ensuring continued eligibility during periods of fluctuation.
The ERIS scheme bridges the gap for innovation-heavy loss-making SMEs, enabling them to secure higher levels of relief than under the merged RDEC scheme. This enhanced support provides critical funding for businesses driving cutting-edge research and development.
Changes to Qualifying Expenditure Rules
The 2024 reforms also introduced significant changes as to what qualifies as R&D expenditure:
Subcontracted R&D
Under the merged R&D scheme, the treatment of subcontracted R&D has been expanded to provide more opportunities for relief, though with some important modifications:
- Previous RDEC Rules: Relief for outsourced R&D under the RDEC scheme was limited to costs incurred with ‘qualifying bodies’ such as universities and other not-for-profit organisations.
- Previous SME Rules: SMEs were able to claim 65% of costs for most subcontractor payments.
- Merged Scheme: All companies may claim subcontractor payments, provided it was ‘intended or contemplated’ at the time the contract was entered into that the subcontractor would perform R&D activities to fulfil the agreement.
Subcontractors may make a claim for R&D relief in the following limited circumstances:
- Costs incurred on in-house R&D unrelated to a customer contract.
- Cases where the customer did not initially expect R&D would be necessary but it became required during the project.
- Work for an ineligible company, such as an overseas company or non-taxable entity (e.g., charities, universities, or government bodies).
Subsidised Expenditure
Changes to the R&D regime have rendered the previous rules around subsidised expenditure obsolete. Consequently, relief may now be available for R&D projects that are subsidised or grant-funded.
Externally Provided Workers (EPWs)
In response to concerns about excessive claims for externally provided workers, relief has been limited to UK workers who are paid through a PAYE scheme. As a result, costs associated with personal service companies will generally only qualify up to the amount of salary drawn.
Overseas R&D Costs
From 1 April 2024, overseas outsourcing costs will no longer qualify for relief unless exceptional conditions apply, such as:
- Regulatory or Environmental Needs: Conditions that cannot reasonably be replicated in the UK.
- Geographical or Social Necessity: Unique circumstances making UK-based R&D impractical.
This restriction excludes certain categories, such as in-house staffing, consumables, and software costs, which remain unaffected.
Compliance Requirements
Notification
For accounting periods beginning on or after 1 April 2023, companies must notify HMRC of their intent to claim R&D relief using a digital form within six months after the end of the period of account.
However, there are exceptions to this rule - notification is not required if the company:
- Makes the claim within six months from the end of the period of account; or
- Has made an R&D claim within the three years preceding the end of the claim notification period; or
- Has an accounting period that falls within the same period of account as another accounting period for which an R&D claim or notification has already been made.
These exceptions aim to streamline the process for businesses with an established history of R&D claims.
R&D Claims
R&D claims must be made in the company’s tax return using form CT600L. For accounting periods beginning on or after 1 April 2023, the time limit for making a claim is two years from the end of the period of account to which the claim relates.
Additional Information
For R&D claims made on or after 8 August 2023, the company must also submit additional information to HMRC using a digital Additional Information Form (AIF) before submitting the company tax return. This form captures the following:
- Details of the R&D undertaken, such as the scientific or technological uncertainties faced and overcome.
- A breakdown of the qualifying costs into the various categories such as staff costs and software.
- Details of any agent who has advised on the claim.
- Details of the company officer responsible for ensuring the accuracy of the information provided.
Failure to comply with these requirements or provide sufficient documentation can result in delays or disqualification of the claim. Ensuring claims meet the prescribed standards not only maximises potential relief but also reduces the risk of scrutiny from HMRC.
What Should You Do?
R&D tax relief is complex, but the financial incentives are well worth the effort. If your business undertakes innovative projects, professional guidance is key to identifying eligible activities and maximising your claim. At Veritas ATS, we provide expert support every step of the way, ensuring compliance and delivering the best possible outcomes for your business.
Get in Touch
For more information on the merged R&D tax relief scheme and how it affects your business, contact us today to arrange a free consultation.
This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.
Liam O'Riordan
As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.
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