The future of R&D tax credits
Merged R&D tax credit Scheme and R&D Intensive SME Relief
In the wake of the Spring Budget 2024, the UK government has set the stage for a fundamental transformation of research and development (R&D) tax incentives. With confirmation of the introduction of the unified R&D tax relief scheme for accounting periods beginning on or after 1 April 2024, innovative businesses across the nation are going to see a significant shift.
The new merged scheme aims to streamline the tax relief process by merging the existing Small and Medium-sized Enterprises (SME) and Research and Development Expenditure Credit (RDEC) schemes into a single, unified system. Despite the intention to simplify, the reality is that businesses still face a landscape that consists of two separate reliefs, with the introduction of an R&D Intensive SME relief for R&D-intensive companies. Let’s take a look at each in turn.
Unveiling the new Merged Scheme
At its core, the new merged scheme is an amalgamation of the current SME and RDEC reliefs, designed to operate similarly to the existing RDEC scheme, whilst integrating select elements from the SME relief.
The key takeaways of the relief are as follows:
An above the line tax credit
As in the RDEC scheme, the new merged R&D tax scheme introduces an above-the-line (ATL) credit. An ATL credit directly impacts the profit before tax, enhancing visibility by reflecting the benefit as a credit in the company’s income statement, rather than merely a deduction from the corporation tax liability. This approach makes the financial benefits of R&D credits more apparent to stakeholders.
PAYE/NICs
The legislation for the merged scheme adopts the more generous version of the payable credit cap found in the current SME scheme. This is significant, as it directly impacts the amount of credit businesses can claim.
Subcontracted R&D
HMRC has significantly updated its position on subcontracting for the merged scheme, stating that the claim, broadly speaking, lies with the company that decided to do the R&D (despite the existence of a commercial contract with a customer), a significant and substantial shift from their current draconian interpretation which has denied many SME’s from being able to claim.
Grants and subsidies
This being one of the largest and most significant changes, in that a grant or subsidy will no longer affect your R&D tax credit claim.
Overseas R&D
The scheme introduces previously delayed limitations on relief for overseas expenditures on externally provided workers (EPWs) and subcontracted R&D.
SMEs and larger companies will encounter changes to the relief regulations they have become accustomed to. It’s crucial to consult with a qualified tax professional to understand how this new legislative framework impacts your specific business situation.
Introducing the new R&D Intensive SME Relief
In addition to the new unified R&D tax scheme, the additional relief for R&D intensive SMEs that are loss making companies – introduced in April 2023 – will continue.
For expenditure incurred after 1 April 2023, SMEs that invest heavily in R&D (over 40% of total business spend) and are operating at a loss have the ability to benefit from an 86% enhancement on expenditure and receive a 14.5% payable credit on trade losses surrendered. For accounting periods starting on or after 1 April 2024, this intensity threshold is reduced to 30%, meaning that more loss making SMEs will be eligible for this enhanced rate.
There will also be a one-year grace period for businesses that drop just below the 30% R&D expenditure threshold, providing some stability and consistency for SMEs regarding their eligibility for the intensive scheme. This measure aims to reduce businesses from jumping between qualifying and not qualifying for the scheme, thereby securing a more predictable environment for financial and investment planning.
For accounting periods starting on or after 1 April 2024, the existing limitations on subsidised R&D will no longer apply to R&D intensive SMEs, offering them greater flexibility and support in their R&D activities.
- For Accounting periods starting on or before 31 March 2024
- Available for loss making and profit making SMEs
- Up to 33% tax relief for expenditure incurred on or before 1 April 2023
- Up to 19% tax relief for expenditure incurred on or after 1 April 2023 (up to 27% for R&D intensive SMEs)
- For Accounting periods starting on or before 31 March 2024
- Available for all large companies and SMEs in certain circumstances
- Up to 20%* tax relief
*taxable income
- For Accounting periods starting on or after 1 April 2024
- Available for all companies
- Up to 20%* tax relief
*taxable income
- Available to loss making R&D intensive SMEs
- Up to 27% tax relief
- For expenditure incurred on or after 1 April 2023, companies will need to have spent at least 40% of their total business spend on R&D activities
- For accounting periods starting on or after 1 April 2024, companies will need to have spent at least 30% of their total business spend on R&D activities
Matthew Jones, Managing Director at LimestoneGrey, commented
‘The R&D tax credit landscape has experienced a raft of changes in recent years, complicating businesses’ ability to strategise their R&D efforts effectively.
Despite the government’s initial concept of a singular unified scheme, there will continue to be two schemes operating concurrently. The roll-out of the new merged scheme and the R&D intensive scheme expands the relief options currently available to four, creating a confusing situation for companies navigating their R&D tax credit journey.
Over time, this will consolidate to two main schemes, hopefully providing some stability going forward.’
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Are you concerned about how R&D tax credit changes affect your company? Do you need further information on the new reliefs available?
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