The Merged R&D Scheme Explained
The Merged Scheme reshapes the R&D landscape, changing substantially the way the incentive works.
What is the Merged Scheme?
The Merged Scheme brings together the SME and RDEC incentive in an attempt to simplify access to R&D relief for companies. This new scheme sets out the rules that companies will need to follow when claiming R&D tax relief going forward.
What are the implications of the Merged Scheme?
For accounting periods beginning on or after 1St April 2024, the Merged Scheme will replace SME and RDEC schemes, creating a unified set of qualifying rules applicable to all companies regardless of size.
An above the line credit rate of 20% will be available to eligible companies under the Merged Scheme.
Despite Government efforts to create a unified set of rules for R&D tax relief, the Merged Scheme will not be the only incentive available for companies. The SME intensive scheme, which was initially announced in the Spring Statement 2023, remains in force, though a lower threshold has been introduced. This incentive – now known as the Enhanced R&D Intensive Support (ERIS) – will allow companies spending over 30% (previously 40%) of their total costs on qualifying R&D activities to access a higher rate of recovery (up to 27% of their qualifying expenditure).
What are the eligibility criteria for the Merged Scheme and ERIS?
Under the Merged Scheme, the eligibility criteria that define what qualifies as R&D remain unchanged. As such, claimant companies should still refer to the DSIT guidelines (which define R&D for tax purposes) in addition to the Guidelines for Compliance (GfC) (which expand on the DSIT).
To access the ERIS scheme, the definition of SME also remains unchanged. Companies must have:
fewer than 500 staff and
either a turnover lower than €100 million or total assets that do not exceed €86 million to meet the eligibility criteria.
Further, to benefit from the enhanced support companies will need to have registered a loss for the relevant accounting period and spent at least 30% of their total costs on qualifying R&D costs.
How does the Merged Scheme work in practice?
The Merged Scheme is modeled on the RDEC scheme, with an aligned set of qualifying rules and a more visible above the line credit rate of 20% that will apply to all companies, regardless of size (with the exception of SMEs that fall under the ERIS scheme).
The credit received through the Merged Scheme can still be used to offset tax liabilities or paid as a tax credit.
Despite being based on the RDEC scheme, the Merged Scheme introduces some key changes to the previous legislation.
Do qualifying costs remain unchanged?
Most of the qualifying costs categories remain unchanged (Read more in our information on Research and Development Expenditure Credit (RDEC), however, unlike the RDEC scheme, the Merged Scheme will allow companies to claim for subcontractor costs.
Subcontractor costs
Where R&D is subcontracted, the new scheme will allow the company making the decision to undertake the R&D to recover their costs. The Merged Scheme is designed to create a clear distinction over which company in an arrangement is able to claim R&D tax relief for the project.
This should prevent two companies from claiming for the same R&D project, benefiting only the company who decided to undertake the R&D.
Under the Merged Scheme:
Companies will be entitled to claim qualifying subcontractor costs.
On the other hand, subcontracted companies will no longer be able to claim their costs for work contracted to them. However, contracted companies may still be able to claim tax relief if they have to initiate R&D which does not form part of the customer’s R&D project.
For consistency, these changes will also apply to R&D intensive SMEs under the ERIS Scheme for accounting periods beginning on or after the 1st April 2024.
Grant funding and subsidised expenditure
Under the new Merged Scheme, restrictions around subsidised expenditure will no longer impact claimant companies.
This is particularly relevant for SMEs, as the previous legislation included restrictions on the amount of tax relief available for grant-funded R&D projects.
Under the Merged Scheme (and ERIS), grant funding will no longer impact R&D tax relief claims.
Restrictions on eligible expenditure for overseas subcontractors
From accounting periods beginning on or after 1st April 2024, the previously announced restriction for overseas expenditure have now come into effect (delayed from 1st April 2023).
In practice, only costs associated with subcontractors and externally provided workers undertaking R&D activities on behalf of the claiming company in the UK will be eligible.
However, there are still instances where companies will be able to claim the costs of overseas subcontractors, such as instances where it is deemed “wholly unreasonable” for the claimant company to carry out R&D activities in the UK.
Need clarification on overseas subcontractor restrictions?
Get in touch. We can offer guidance on whether these restrictions apply to your businesses based on your specific circumstances
PAYE cap
Under the Merged Scheme, the PAYE cap limits the amount of payable credit companies can receive for accounting periods where the cap applies. However, any excess of the cap can now be carried forward and will be part of the entitlement of the company for the next financial year.
The cap is calculated as £20,000 plus 300% of the company’s PAYE and National Insurance Contribution liabilities, which remains unchanged from the previous legislation.
It’s important to note that the cap doesn’t apply to all companies. Specifically, a company is exempt from the cap if it:
is creating, preparing to create, or managing Intellectual Property and
does not spend more than 15% of its qualifying R&D expenditure on connected parties.
First time claimant?
The Merged Scheme follows the pre-notification rules which means first-time claimants will need to notify HMRC six months in advance about their intention of submitting an R&D application.
These rules also apply to companies that didn’t claim R&D in the 3 years before the last date of the claim notification period.
Need support to navigate the Merged Scheme?
Apogee have you covered. Our experts can guide you through the implications of the Merged Scheme on your R&D application, ensuring you recover everything you’re entitled to through a maximised and fully compliant R&D claim.
Call 01527 357789 or email info@apogee.co.uk