As of 1 April 2024, a significant shift in the UK’s R&D tax relief landscape took place with the introduction of the merged R&D expenditure credit scheme. This new regime replaces the previous two schemes—the SME R&D Tax Relief Scheme and the Research and Development Expenditure Credit (RDEC) scheme. For many businesses, this has become the primary method of claiming tax relief for R&D expenditure.

We understand tax relief – R&D expenditure credit scheme

At KPN Accounting Limited, we understand that tax relief can provide valuable financial support to innovative companies engaged in research and development. However, keeping up with evolving tax laws and understanding how these changes impact your business can be daunting. In this comprehensive guide, we break down the key aspects of the new regime to help you make the most of the opportunities available.

What is the merged R&D expenditure credit scheme?

Since April 2024, companies no longer need to navigate separate schemes based on size. The new merged R&D expenditure credit scheme has combined the previous schemes into a single, simplified system. The application of this system varies depending on the type and structure of your business and the nature of your R&D activities.

A quick recap of the previous schemes:

SME R&D Scheme: Available to small and medium-sized enterprises (SMEs), providing tax relief for qualifying R&D expenditure.
RDEC Scheme: Mostly applicable to large companies, offering a different structure of relief.

Under the new merged regime, many of the benefits from the old schemes continue, but there are also significant changes that businesses need to be aware of.

Key features retained in the R&D expenditure credit scheme

Before diving into what has changed, let’s look at some of the features carried over from the previous schemes:

Qualifying Expenditure: To qualify for R&D tax relief, expenditure must meet certain criteria:

The expenditure must be accounted for as R&D under Generally Accepted Accounting Principles (GAAP).
The expenditure must relate to R&D activities as defined by guidelines from the Department for Science, Innovation and Technology (DSIT).
The expenses must fall within specific categories, such as employee costs, software and cloud computing costs, consumables, and payments to clinical trial subjects.

Categories of Expenditure – No Changes:

Employee costs (only for employees directly involved in R&D) remain eligible for relief.
The ability to claim for software, data licenses, cloud computing costs, and consumables used in R&D remains unchanged.
Payments made to participants in clinical trials are still eligible for R&D relief.

The new merged R&D expenditure credit scheme: major changes you need to know

Let’s discuss the changes under the new regime that businesses must be prepared for. These adjustments can significantly impact the scope and extent of relief that companies can claim, especially those relying on external workers or engaging sub-contractors.

1. Externally provided workers: New UK payroll requirement

Under the previous R&D tax relief schemes, companies could claim relief for the costs of externally provided workers (EPWs), even if these workers were not on the company’s UK payroll. EPWs, typically provided by agencies or group companies, were often crucial for large-scale or specialised R&D projects.

What has changed? Starting 1 April 2024, R&D tax relief for EPWs is only available if these workers are on a UK payroll. This new rule is intended to keep R&D jobs within the UK, supporting local employment. However, it also means that companies need to review their external workforce arrangements if they currently employ overseas workers.

There is an exception: If the R&D activity cannot be performed in the UK (due to geographical, environmental, or legal constraints), then relief may still be available for non-UK EPWs. For example, research on active volcanoes, which do not exist in the UK, could still qualify for R&D relief for workers based abroad.

2. Sub-contracting rules: A major shift in eligibility

Previously, under the SME scheme, companies that sub-contracted R&D activities could claim tax relief, whether they were the principal company or the sub-contractor. Similarly, under the RDEC scheme, large companies could not claim relief for sub-contracted R&D work unless the sub-contractor was a charity or certain other bodies.

What has changed? Under the new merged scheme, the main company (the one commissioning the R&D work) now has the right to claim R&D tax relief, not the sub-contractor. This change simplifies the process but also limits relief for SMEs acting as sub-contractors to larger businesses.

It’s important to note that if you sub-contract R&D work, the work must be carried out in the UK to qualify for relief. The same exceptions that apply to externally provided workers also apply here—if the R&D cannot be conducted in the UK, you may still qualify for relief.

3. Transition rules: Navigating the overlap period

As the new regime came into effect for accounting periods starting on or after 1 April 2024, some companies may have experienced a transition period during which they operated under different schemes depending on when their financial year began.

For example, consider a large company whose financial year started on 1 April 2024 that subcontracted R&D work to an SME whose year started on 1 January 2024. During this transition phase, both companies may have claimed R&D tax relief under different schemes for the overlapping period. The large company would claim under the new scheme, while the SME could still claim under the old scheme for that period.

Transitional rules ensure that companies in this situation are able to claim the correct relief, but the old relief takes precedence during the overlap period.

Relief available under the merged scheme: How much can you claim?

Once you determine your qualifying expenditure, the new merged scheme provides an above-the-line credit of 20% on eligible R&D spending. This credit is taxable at the company’s normal corporation tax rate and must first be used to offset any existing tax liabilities. If there are no liabilities, the credit can be carried forward, surrendered to group companies, or repaid in certain cases.

For loss-making companies, the relief works slightly differently. The 20% credit is reduced by 19%, with the remaining 81% compared to a cap based on PAYE and NIC liabilities. Any excess is carried forward or surrendered, but the actual cash benefit for loss-making companies is 16.2% of eligible R&D expenditure.

The research-intensive SME scheme: Maximising relief for innovative businesses

Research-intensive SMEs—businesses that dedicate a significant portion of their expenses to R&D—continue to benefit from enhanced relief under the new scheme. To qualify, an SME must spend at least 30% of its total relevant expenditure on R&D activities.

Research-intensive SMEs can claim a higher cash credit rate of 14.5%, which is particularly valuable for loss-making businesses. This rate provides greater relief compared to the standard 16.2% available under the merged scheme.

Maximising your tax relief: How KPN Accounting Limited can help?

The introduction of the new merged R&D expenditure credit scheme presents opportunities for businesses to boost cash flow and continue investing in innovation. However, the changes come with complexities that require careful planning and strategic tax management.

At KPN Accounting Limited, we specialize in guiding businesses through the intricacies of R&D tax relief. Whether identifying qualifying expenditure, ensuring compliance with new rules, or maximizing claims, our expert team is here to help you every step of the way.

Whether you’re a large company affected by the new sub-contracting rules or a research-intensive SME looking to maximize relief, our tailored services will ensure you make the most of this critical tax benefit.

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Tagged R&D expenditure, tax relief

Navigating the new merged R&D expenditure credit scheme: What your business needs to know?