R&D tax relief rates
The latest Autumn Statement confirmed that merging the R&D tax relief scheme will be effective for accounting periods from 1 April 2024. If you engage in R&D activities, this reform will have significant implications.
In January 2023, the government opened a consultation on the merging of the scheme, a policy paper followed in July, and supporting documentation was published hours after the announcement of the Autumn Statement. This supporting documentation lays out the foundations for the imminent merger of the Small and Medium Enterprise (SME) and Research and Development Expenditure Credit (RDEC) scheme, which will affect every company that claims.
After thoroughly reviewing the supporting documentation, we have analysed the rules in depth. Here’s everything you need to know so far.
The Autumn Statement confirmed the merging of the schemes
Initially termed as a ‘potential merger,’ the Autumn Statement on the 22nd of November confirmed the merging of the SME and RDEC tax relief schemes will go ahead.
The House of Lords Finance Bill Sub-Committee had some reservations, issuing a report proposing a one-year delay in merging the scheme.
Despite this, the recent finance bill and Spring Budget have affirmed that the merger will take effect for accounting periods starting on April 1, 2024.
What is the merged R&D scheme?
The merged scheme will primarily follow the RDEC rules, emphasising the significance of R&D within a company’s pre-tax income. For larger businesses already claiming through the RDEC scheme, this ‘above-the-line credit’ approach will not entail a significant transition.
SMEs are advised to start planning for these changes sooner rather than later. However, elements from the SME scheme will be incorporated, which will offer more favourable outcomes for all businesses undertaking R&D projects.
It’s crucial to note the existence of an R&D-intensive SME incentive running alongside the merged R&D scheme. If you’re an SME, determining whether you qualify for the R&D-intensive incentive or the merged scheme is key. To ascertain your eligibility, you need to calculate if your R&D expenditure constitutes 30% or more of your total expenditure.
If you’d like to discuss this further, contact one of our experts today, who would happily take you through the changes.
Key Components of the Merged Scheme
- Definition of R&D: The core definition, based on guidelines, remains unchanged. Companies must demonstrate that their project aims to make an advance in science or technology.
- Rates of relief: A unified relief rate of 20%, with a net benefit of 15%, is proposed, calculated using the main rate of corporation tax. A special relief rate for R&D-intensive companies (up to 27%) would continue alongside the merged scheme.
- Loss cap rules: The more generous SME scheme loss cap rules are proposed to be adopted in the merged scheme. For instance, the notional tax rate applied to loss-makers in the merged scheme will be the small profits rate of 19% rather than the 25% main rate set in the current RDEC.
- Subcontracted R&D: The scheme would allow for broader claims on outsourced R&D costs, similar to the current SME scheme, with certain restrictions.
- Subsidised R&D: Subsidised expenditure rules in the current SME scheme won’t apply to the new merged scheme. This means that if a company receives a grant for their R&D costs, the relief available won’t be reduced.
- Overseas costs: A proposed ban on claiming for overseas outsourcing costs is slated to be part of the new scheme. Find out more here.
What are the merged R&D scheme rates?
You may be aware that the R&D tax relief scheme has undergone significant changes in recent years. The following table illustrates the rate adjustments and provides an overview of the merged scheme rates.
| SME Scheme | RDEC Scheme | Merged Scheme | |||
|---|---|---|---|---|---|
| Time scale | up to 31/03/2023 | From 01/04/2023 | up to 31/03/2023 | From 01/04/2023 | From 01/04/2024 |
| Profit-making SME | 130% enhancement = 24.7% net benefit | 86% enhancement = 21.5% net benefit | NA | NA | Rate 20% = between 14.7% - 16.2% after tax |
| Loss-making company | R&D costs plus 130% enhancement = 230 x 14.5% rate = 33.4% credit | R&D costs plus 86% enhancement = 186 x 10% rate = 18.6% credit | NA | NA | 16.2% |
| Loss-making SME R&D intensive company | NA | R&D costs plus 86% uplift = 186% x 14.5% rate = 26.97% | NA | NA | NA |
| Large company | NA | NA | RDEC rate 13% = 10.5% after tax | RDEC rate 20% = Up to 16.2% | Up to 16.2% |
Impact on businesses
The merging of these schemes impacts a wide range of companies involved in R&D activities. Smaller companies may see a reduction in the benefits from R&D relief claims. Additionally, the new rules on subsidised R&D and overseas costs will necessitate careful planning and decision-making for businesses, particularly those receiving grants.
Preparing for transition
Businesses, particularly small and medium enterprises (SMEs), must be ready for potential changes. It was expected that the merging of the scheme might be delayed by a year. However, the Autumn Statement confirmed this will not be the case.
With this in mind, please don’t hesitate to contact us for advice. We can help evaluate the impact and determine any necessary organisational adjustments.
Government’s stance and policy objectives
The government’s aim is to support R&D as a driver of innovation and economic growth. The merged scheme is viewed as a step towards tax simplification and effectively using taxpayers’ money. A final decision on the merger is likely to be made in the Autumn Statement.
Stay informed
Listen to our latest podcast on the Autumn Statement, where we dive into the impacts of the UK government’s decision to merge the R&D tax relief schemes. Our CEO, Rob Whiteside, provides valuable insights on navigating these changes. Don’t miss out on this opportunity to stay informed about the evolving landscape of R&D tax relief in the UK. Save the date and be part of the conversation.
