The new ‘merged’ R&D scheme

The issue

For accounting periods on or after 1 April 2024, the R&D scheme for Small and Medium Enterprises (‘SMEs’) and RDEC scheme for large companies will be replaced by a new single scheme (often referred to as the ‘merged’ R&D scheme). Below we consider how the new rules will impact SME companies which submit R&D claims.

The ‘merged’ R&D scheme

The new merged scheme is very similar to the previous RDEC scheme and provides an ‘above the line’ tax credit on qualifying R&D expenditure of 20%. This is then subject to corporation tax itself to give an effective relief of up to 16.2% on qualifying expenditure. This is a very different methodology to the previous SME scheme and will significantly impact the value of claims for SME companies. The table below compares how much relief is given for every £1 of qualifying expenditure under the old and new R&D schemes.

You can see that the new merged scheme is less generous than the old SME scheme and SME’s need to be aware that their repayable tax credits are going to decrease. It may be worth reading our previous tax bite, “Maximise your R&D relief claim by changing the year end” to consider how R&D claims can be maximised during the transitional period.

SME R&D intensive scheme

There is an opportunity for loss-making SMEs which qualify for the SME R&D intensive scheme to achieve a better rate of relief.

In order to qualify as an R&D intensive SME the following conditions must be met:

• 30% of the company’s total expenditure must be incurred on research and development (previously this was 40%)
• The company must meet the definition of an SME (less than 500 employees and either a turnover of under €100 million or under €86 million of gross assets.

Under the R&D intensive scheme, qualifying SMEs will continue to operate under the old SME rules, with qualifying expenditure receiving an additional 86% enhanced deduction and the ability to surrender trade losses for a 14.5% repayable credit. This leads to an effective rate of relief of around 27% on the companies’ qualifying R&D expenditure. Note that once R&D intensive companies become profit making, they will fall back into the merged scheme.

WSM’s view

HMRC’s attitude towards R&D claims has taken a downward turn in recent years and it will be interesting to see whether the relief will be further eroded or replaced in the future. The purse strings have certainly been tightened and HMRC are now looking at R&D claims in much greater detail (apparently as many as 72% of claims are now being rejected or enquired into). The combination of increased HMRC scrutiny, more onerous reporting requirements and less generous reliefs may lead some companies to decide that the administration involved with making an R&D claim outweighs the potential tax reliefs on offer. SME companies who still want to access the relief should consider changes to their year ends in the transitional period to maximise the relief obtainable under the old rules and/or considering the viability of qualifying for the intensive scheme.