In yesterday’s Autumn Statement, Chancellor Jeremy Hunt confirmed the government will combine SME R&D Tax Relief and the R&D expenditure credit (RDEC) into a single merged scheme, known as the new RDEC scheme.
The establishment of the new RDEC scheme is one of the biggest changes in the 23-year history of R&D Tax Relief. It follows hot on the heels of a string of other reforms implemented over the last 12 months.
Head here for a complete guide to the merged (aka ‘new RDEC’) scheme, including who’s eligible, how to claim, and how it differs from what came before.
R&D Tax Relief merger
The government is pressing ahead with plans published in July 2023 to combine RDEC and SME R&D Tax Relief for profitable and unprofitable, non-R&D-intensive businesses into a single regime that will serve most businesses claiming R&D Tax Relief.
Impacting accounting periods starting on or after 1 April 2024, the new scheme will closely mirror RDEC, offering companies an above-the-line credit worth 20% of their qualifying expenditure.
After tax, profitable companies will receive either 16.2p or 15p per £1 of investment, depending on their tax rate.
Unprofitable companies will be subject to a notional tax of 19%, meaning they will receive 16.2p per £1 of investment. This makes the merged scheme more generous than the current RDEC scheme, which has a notional tax rate of 25%, in line with the main rate of corporation tax.
R&D-intensive threshold lowered
The government is lowering the R&D intensity threshold from 40% to 30%.
This threshold determines what proportion of an SME’s total expenditure must be spent on qualifying development costs for it to claim under the more generous enhanced R&D intensive support scheme (ERIS) scheme.
The government estimates that this change will allow another 5,000 loss-making SMEs to access the ERIS scheme.
Introduced following backlash against cuts to the SME scheme, ERIS offers a relief rate of 27%, making it the most valuable form of R&D Tax Relief.
The government is also introducing a grace period that allows companies that fall below the 30% intensity threshold to claim under the ERIS scheme for an additional year.
How this affects your relief
Here’s what the merged scheme means for your R&D Tax Relief.
| Company Type | Relief Pre 1 April 2023 | Current Rates | Relief From 1 April 2024 | Difference |
|---|---|---|---|---|
|
SME - Profit-making |
24.7% |
16.34% |
15% |
-8% |
|
SME - Break even
(non-R&D intensive) |
18.85% |
8.6% |
16.2% |
+88% |
|
SME - Loss-making (non-R&D intensive) |
33.35% |
18.6% |
16.2% |
-13% |
|
SME - Break even (R&D intensive) |
18.85% |
12.47% |
12.47% |
0% |
|
SME - Loss-making (R&D intensive) |
33.35% |
26.97% |
26.97% |
0% |
|
Large - Profit-making |
10.53% |
15%-16.2% |
15%-16.2% |
0% |
|
Large - Loss-making |
10.53% |
15% |
16.2% |
+8% |
As we can see, loss-making, non-R&D-intensive SMEs will be worse affected by this merger.
Between April 2023 and 2024, small, unprofitable businesses stand to lose 51% of their R&D Tax funding, with relief rates plummeting from 33% to 16.2%.
This will be a difficult pill to swallow for loss-making SMEs, which are least able to self-finance development work and are most vulnerable to economic hardship.
Conversely, non R&D-intensive SMEs breaking even will see their R&D Tax Relief almost double. This corrects a strange facet of the SME scheme, where companies were effectively punished for breaking even by being given less funding. We called this peculiar situation ‘the valley of death’.
PAYE Cap carried over from SME R&D Tax Relief
The new scheme will use the PAYE Cap limits that apply to the current SME scheme.
The PAYE Cap limits the size of payable credit loss-making companies can receive based on the size of their combined PAYE and NIC liability.
The SME cap lets loss-making companies claim a payable credit worth up to 300% of their combined PAYE and NIC liability, plus £20,000.
This is considerably more generous than the RDEC cap, which limits a company’s payable credit to just 100% of their PAYE/NIC liabilities.
Stay up to date with GrantTree's Newsletter
Keep up to date with all the latest changes to R&D Tax Relief by signing up for GrantTree’s newsletter.
Subcontracted R&D and the combined scheme
Both large companies and SMEs will be able to claim R&D Tax Relief on subcontractor costs under the combined scheme.
However, the rules around claiming for contracted R&D have been overhauled.
In summary:
- Generally, the right to claim relief on contracted R&D will sit with the customer
- This is a change from the previous rules where a company’s ability to claim relief on contractor costs was linked to its size
- The rules establish a new definition of ‘contracted out’ R&D
- The arrangement between the customer and contractor must satisfy this definition for the customer to claim relief
- If the arrangements don’t satisfy this definition, or the customer is ineligible for R&D Tax Relief, the contractor may be eligible to claim relief on the work instead
Read our detailed breakdown of the new rules around claiming R&D Tax Relief for contracted R&D.
Claims under the merged scheme will also be impacted by restrictions on claiming relief on overseas subcontractors and externally provided workers.
Why is the government merging the schemes?
The merger is one the last of a series of major reforms designed to improve compliance, deliver value for money for taxpayers, and ensure R&D Tax Relief effectively incentivises innovation. These reforms were based on a comprehensive review of R&D Tax Relief conducted by HMRC in early 2021.
The government says the merger was specifically designed to “simplify and improve R&D Tax reliefs”. Will it achieve this? Time will tell. But given we will still have multiple schemes, a lack of clarity around issues like subcontractors, and different rates of relief on offer, it’s far from certain.
According to the Autumn Statement, the merger will save the government £280 million. In last year’s Autumn statement, the Chancellor explained he was cutting relief for SMEs because of “worrying reports” of abuse. It’s possible the merger is also another attempt to cut the cost of non-compliance.
Compliance remains a priority
There might not be any more major changes on the horizon, but the government has vowed to continue its campaign against non-compliance, which cost the exchequer 1.13 billion in the 2020 financial year. “Further action may be needed to reduce the unacceptably high levels of non-compliance in the R&D reliefs,” the government said.
HMRC is developing an action plan for improving compliance, which will be released “in due course”. GrantTree will be analysing the plan once it’s published and explaining what it means for claimants. Stay up to date by subscribing to our newsletter.
The Chancellor also announced an extra £5 billion in HMRC funding to improve compliance and reduce tax avoidance. As a result, we are likely to see another rise in the number of enquiries, putting further pressure on businesses to ensure their submissions only contain eligible projects and costs.
Questions? Speak to GrantTree
If you have questions about how this latest round of changes affects your next claim, GrantTree’s R&D Tax experts are here to help.
We can run you through what the merger means for your future submissions, how much more or less relief you can expect to receive, and what you can do to protect yourself from the government’s ongoing compliance drive.
