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R&D Tax Credit Changes 2024: The New Merged R&D Scheme

The government announced in the Autumn Statement 2023 that a single, combined scheme for R&D tax relief will launch for accounting periods beginning on or after the 1st of April 2024. This will replace the old RDEC and small and medium-sized enterprise (SME) schemes. The expenditure rules for both are the same, but the calculation is different.

The New R&D Scheme At A Glance

The draft legislation establishes a single R&D relief, delivered in a similar way to the existing RDEC; that is, as an expenditure credit. It differs from the current RDEC however in several respects, most notably that companies will be able, in general, to claim for payments made as part of an R&D project to subcontractors, as is currently possible in the SME scheme.

The draft legislation also uses the more generous version of the PAYE/ NICs payable credit cap included in the current SME scheme, and includes the restrictions on relief for overseas expenditure which will come into effect from the 1st of April 2024.

Government support for R&D through tax reliefs will continue to increase, from £6.7 billion in 2020-21 to over £9 billion in 2027-28 – but in a way that ensures better value for the taxpayer. The R&D reliefs will support an estimated £60 billion of business R&D expenditure in 2027- 28, a 60% increase from £38 billion in 2020-21. 

Reasons for the merge:

– Companies can currently claim under two schemes, which can be complex. A single scheme would be less confusing.

– There can be arguments about which scheme applies to certain projects, especially with subcontracted R&D. One scheme avoids these disputes.

– RDEC offers a clearer picture of the tax credit amount upfront, making it more appealing for investors.

– The UK is unique in having two schemes. Having one scheme, like most countries, would streamline the tax system.

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What are the new R&D Tax Credit Changes?

The legislation received Royal Assent on the 22nd February 2024, meaning from April 1st, 2024, the Government will be merging the SME R&D scheme with the RDEC scheme.

Previously these were two different schemes for either small-to-medium-sized enterprises (SME) or large companies (RDEC). The differences between the two are as follows:

SMEs are categorised as: 

– Fewer than 500 employees. 

– An annual turnover not exceeding £86.12 million, Or

– A balance sheet not exceeding £74.06 million.

On the other hand, large companies are categorised as:

– A staff headcount of over 500.

– A turnover of £86.12 million or more.

– At least €74.06 million in gross assets.

Other ways to determine whether a company’s R&D claim sits under the SME or RDEC scheme include:

– If the company is a member of a 51% group.

– If the company has any private equity shareholders.

– If the company is in receipt of grant funding.

How the R&D SME Scheme Used To Work

SMEs, or small to medium-sized enterprises, benefit from a more generous R&D tax credit scheme. From April 1st, 2023, loss-making SMEs can deduct 18.6% from their annual tax expenditure.

However, if the SME’s R&D expenditure represents 40% or more of their total expenditure, their tax relief will increase to 27%.

Read more about the SME scheme

How the RDEC Scheme Used To Work

Large companies receive a lower percentage of eligible R&D costs as tax credits compared to SMEs. The rate for large companies is typically around 10-13% of qualifying R&D expenditures.

Read more about the RDEC scheme

Subcontracting R&D Tax Credit Changes In More Detail

– The Government has argued that with 2 schemes, the rules for subcontracting create confusion:

  • SME allows claims for 65% of qualifying subcontractor costs (unconnected companies only).
  • RDEC rarely allows subcontractor claims, usually the subcontractor itself claims.
  • This can lead to situations where neither company (main company or subcontractor) gets credit for “routine” (non-R&D) work within a larger project.

– The Government wants to simplify the new combined scheme and is currently deciding between 2 options:

  • Option 1 (SME rules): Large companies could claim for any subcontractor, potentially benefiting some sectors and preventing the “routine” work issue. However, subcontractors and companies with subsidised R&D couldn’t claim.
  • Option 2 (RDEC rules): Keeps things simpler for companies but prevents claims for subcontractors and subsidised R&D (though subcontractors could claim themselves).

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R&D Tax Credit Changes To The Cap On Payable Credits

The UK government offers tax credits to companies that invest in research and development (R&D).  These credits act as a financial incentive, rewarding companies for pushing boundaries and developing new technologies.

The Problem: Fake Companies Taking Advantage

Unfortunately, the previous system wasn’t foolproof. Some overseas companies with little to no UK presence saw an opportunity to exploit the tax credit system.  Here’s how:

– Setting Up Fake Subsidiaries: These companies created shell companies in the UK – essentially fake businesses with no real activity.

– Claiming Unearned Credits: These fake subsidiaries then claimed tax credits for R&D they weren’t doing. This essentially amounted to taking money from UK taxpayers without contributing to UK innovation.

The Solution: Introducing Caps to Prevent Abuse

To stop this kind of exploitation, the government introduced a cap on the amount a company can claim in tax credits. This cap acts as a safeguard, ensuring the system is used for its intended purpose: supporting genuine R&D efforts.

Previously there were two separate R&D tax credit schemes in the UK:

– SME Scheme: This scheme has a more complex cap based on a company’s payroll taxes (PAYE & National Insurance Contributions) with some exceptions for startups.

– RDEC Scheme: This cap is simpler, simply limiting the credit to 100% of the company’s total payroll taxes.

Cap Options for the New System:

– Simple RDEC-like Cap: This would be the easiest option to administer. The cap would be based on a company’s payroll taxes, similar to the existing RDEC scheme. This might be beneficial for large companies with high payroll costs.

– More Complex SME-like Cap: This option might offer a potentially higher credit limit, particularly for startups. However, it would also be more complex to calculate and administer, similar to the current SME scheme cap with its exceptions. This could be more favourable for smaller companies or those heavily focused on R&D compared to labour costs.

Will This Positively Or Negatively Influence Your R&D Claim?

We predict that this will negatively impact small businesses, however, this largely depends on what the details of the new policy will be.

The most important thing when considering the R&D tax credit changes is to ensure that you are staying ahead of the game, not making common R&D mistakes, and utilisng R&D tax credit loans to get your money faster, improving your cashflow, and putting money back into your business sooner, rather than waiting around for HMRC to process your application.

Get in touch to find out more today!