The merged scheme R&D expenditure credit (RDEC) and enhanced R&D intensive support (ERIS) replace the old RDEC and small and medium-sized enterprise (SME) schemes and came into effect for accounting periods beginning on or after 1 April 2024.
Merging the RDEC and SME schemes is part of the government’s drive to simplify and improve the process for claiming R&D tax relief – helping to promote innovation in the UK.
The core definition of what constitutes R&D hasn’t changed. R&D for tax purposes takes place “when a project seeks to achieve an advance in science or technology.” There are many nuances to this statement and it is worth checking as sometimes what constitutes as R&D can be surprising.
The move to a merged scheme is seen as a positive step for businesses, as they now have a single set of qualifying rules and no longer have to transition between RDEC and SME schemes.
Overview of the merged scheme RDEC
The merged scheme broadly follows the rules of the old RDEC but incorporates the more generous SME scheme PAYE and National Insurance contributions cap. It establishes a taxable expenditure credit that can be claimed within the charge to UK Corporation Tax.
The SME rules, restricting relief where part of the project expenditure has been subsidised, have been removed. This means SMEs are now able to claim relief for work for which they receive a grant or other subsidy.
Rules around contracted-out R&D have also been clarified. The general rule here is that the party who takes the decision to undertake R&D will be able to claim.
Merged scheme RDEC rates
- The rate of R&D expenditure credit is 20% (the same as the rate under the old RDEC scheme for expenditure incurred on or after 1 April 2023);
- For loss-makers and small-profit makes (total profits chargeable to Corporation Tax of less than £50,000, excluding the RDEC claimed,) a lower rate of notional tax restriction of 19% applies; and
- For all other companies, the restriction applies at the Corporation Tax main rate of 25%.
Additional relief for R&D-intensive SMEs
The Enhanced R&D Intensive Support (ERIS) scheme replaces the R&D intensive SME scheme. It is only available to SMEs who are loss-making for tax purposes before any additional R&D deduction is taken.
The qualifying intensity threshold for using the scheme has been reduced from 40% to 30% for accounting periods commencing on or after 1 April 2024 – it is anticipated this will enable an additional 5,000 UK companies to qualify for enhanced relief rates.
ERIS rates
- ERIS allows loss-making R&D intensive SMEs to
- Deduct an extra 86% of their qualifying costs (additional deduction) in calculating their adjusted trading loss, as well as the 100% deduction which already appears in the accounts, to make a total of 186% deduction; and
- Claim a tax credit of up to 14.5% of surrenderable losses.
Additional information and non-compliance
The government retains a heightened awareness of the high levels of non-compliance within R&D tax relief schemes and has already introduced a number of measures to tackle this.
For accounting periods starting on or after 1 April 2023, companies are now required to notify HMRC within 6 months of the end of the accounting period that they intend to make an R&D claim. Notification will not be required if the company has made an R&D claim for any of the 3 previous years.
All companies must file an online Additional Information Form (AIF) to HMRC before filing a tax return with an R&D claim. If no AIF is filed, the R&D claim will be rejected automatically.
Familiarisation with the changes and how M+A Partners can help
The merged scheme RDEC is the latest in a series of changes to R&D tax relief and should be a catalyst for prompting a wider review of how businesses manage their R&D claims.
Consideration should be given to how the merged scheme works, evidence of qualifying expenditure, overseas expenditure restrictions, additional information requirements, and how the contracted-out rules may impact claims.
If you think you have undertaken projects that exhibit the qualifying conditions for R&D tax relief, why not have an initial discussion with one of our specialists to see how you might benefit from this regime.
Download our Merged Scheme RDEC and Enhanced R&D Intensive Support factsheet below for further details.
Merged Scheme RDEC and Enhanced R&D Intensive Support