New Merged R&D Scheme Guide and Requirements
The merged R&D scheme, also known as the R&D single scheme or simplified scheme, will be applied like the current RDEC scheme but with some differences.
In 2023, the UK Research & Development (“R&D”) schemes saw many changes. Through some amendments to the guidance, we observed generosity from the Department of Science, Innovation and technology (“SIT”) through the increase in rates for R&D Expenditure Credit (“RDEC”) scheme and extension of eligible fields of Science and Technology and R&D expenditure with the introduction of Mathematics and Cloud Data Expenses being added to the claim. On the contrary, many Small to Medium-sized Enterprises (“SMEs”) are seeing R&D rates reduced by up to 45%.
Looking ahead at 2024, we are waiting confirmation for a significant change to R&D tax relief claims following a Consultation on a proposed merging of the two R&D schemes in one single scheme. The merged scheme is planned operating alongside the additional relief for loss-making R&D intensive SME companies.
What will the proposed merged R&D scheme look like?
The proposed scheme will be largely similar to the current RDEC scheme with some notable changes. The table below shows how R&D tax relief rates have changed in recent years. The merged scheme applies for accounting periods beginning on or after 1 April 2024.
| Current incentives | Current incentives | Merged scheme | ||||
|---|---|---|---|---|---|---|
| Your business | SME R&D tax incentive | RDEC | Merged scheme | SME intensive scheme | ||
| Company type | Before 1 April 2023 | After 1 April 2023 | Before 1 April 2023 | From 1 April 2023 | From 1 April 2024 | From 1 April 2024 |
| Loss-making SME | Up to 33.35% | Up to 18.6% | 10.50% | 15% | 16.20% | |
| Profit-making SME | Up to 24.7% | Up to 21.5% | 10.50% | Up to 16.2% | Up to 16.2% | |
| R&D intensive SME | Up to 27% | Up to 27% | ||||
| Large company | 10.50% | Up to 16.2% | Up to 16.2% | |||
Below we listed some of the key changes to expect.
1. Expenditure Credit
The proposed scheme will be an Expenditure Credit meaning the current profit-making SMEs will need to change how the credit is applied to tax computations and Corporation Tax returns. The seven steps currently applicable to RDEC is likely to be applicable for all R&D claims under the merged scheme.
2. Subcontracting R&D
The new legislation aims to address issues where a series of subcontractors are all working to solve the same scientific and/or technological uncertainty and aims to provide further clarity as to which company should claim the R&D relief.
The plan is for a version of the Subcontracted rules applicable for the SME R&D schemes to be bought into the merged scheme. Subcontractors may be able to claim the relief for a limited number of scenarios such as the Subcontractor is undertaking its own R&D that is unrelated to any customer contracts. Other reasons include if the third party is a university, charity or is not eligible to pay tax within the UK.
There is additional guidance in relation to contracts between parties where the project did not “intend or contemplate” R&D work to fulfil the contract. Companies looking to claim R&D relief in the future, should ensure contracts are in place between the company and the third party and include a detailed scope of works if possible.
3. PAYE/NIC payable credit cap
The potential merged scheme proposes a relatively more generous version of the credit cap. The Department of SIT should share details on how this will be applied to an Expenditure Credit.
4. Overseas expenditure
Effective from 1 April 2023, the Department of SIT updated the legislation relating to overseas expenditure. New guidance states expenditure on payments to subcontractors is required to be UK expenditure, or to be qualifying overseas expenditure. This will be applicable to the proposed merged scheme.
How will I submit a claim for the proposed merged R&D scheme?
Following the R&D claim submission process introduced on 8 August 2023, the claimant company will need to complete the following:
Advance Claim Notification to HMRC is required for those companies that have not made a claim before or there has been a greater than three years since the last R&D claim. This must be submitted no later than six months after the accounting period year end.
A mandatory Additional Information Form (“AIF”) before submitting an R&D claim as part of Corporation Tax return.
When will the merged R&D scheme come into effect?
The changes will be applicable to expenditure incurred on or after 1 April 2024. The Department of SIT will need to confirm how expenditure for accounting periods that do not wholly sit beyond this date should be treated.
How Dragon Argent’s R&D experts can help
As the UK’s premier R&D tax consultancy firm, we provide proactive and tailored advice to businesses like yours. With a track record of engagement in numerous R&D consultations, we consistently showcase our dedication to empowering and championing innovative enterprises. Reach out to us today and let our R&D expertise support your ventures.
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