Merged R&D scheme: What has changed?

What does it mean for claims?

With the merged scheme now in place, there are the two options that businesses have for their R&D tax claims:

• The Merged Scheme: With elements from both the previous SME and RDEC schemes, the merged scheme simplifies claims through a single set of qualifying rules. This credit can be used to offset tax liability or, with some adjustments, can be paid directly to the company in cash. However, those who previously claimed under the SME scheme will notice rates are reduced in the new merged scheme.
• Enhanced Relief for Loss-making R&D Intensive SMEs: A second scheme for R&D-intensive SMEs will run alongside the merged scheme where R&D accounts for at least 30% of its spending. It offers enhanced rates of relief for certain loss-making SMEs, providing a cash benefit of up to 26.97% for every qualifying R&D £1 incurred.

What you need to know

• Overseas R&D costs: This most significant difference to the merged scheme is that since April 1, 2024, expenditure on overseas R&D activities no longer qualifies for the R&D incentives schemes. However, there is an exemption: If the necessary R&D conditions are not present in the UK, but they are in the overseas territory (and it would be wholly unreasonable to replicate them in the UK), then the expenditure may still qualify. You won’t need to provide upfront evidence, but understanding the supply chain and apportioning payments to the UK element is crucial.
• Contracted out R&D: The subcontracted R&D rules incorporated into the merged scheme are modelled on the previously SME scheme rules, and those previously using the RDEC scheme may now benefit from including R&D projects contracted to third parties in their R&D claims.
• Streamlined process: There are now revised forms and procedures, with direct HMRC payments to companies. If you want the payment to be sent to someone connected to your company, you will need to explain how they are connected.
• Subsidised expenditure: Within the merged R&D scheme, there is an important change regarding subsidised R&D expenditure. Unlike the previous SME scheme, where rules often reduced the relief available if a company receives a grant for their R&D costs, the new scheme doesn’t apply these subsidy rules. Therefore, if a company obtains a grant to cover their R&D expenses, the relief available won’t be reduced. Essentially, this change ensures that companies can still benefit from R&D tax relief even if they’ve received financial support or subsidies for their research and development activities, providing them with more financial stability and incentive to innovate. “This is a welcome measure as there had been concerns when the announcements were first made, that where grant funding is received, R&D tax claims would not be able to be made”, says Paul Woodward.

What’s the future for R&D tax claims?

With the merged scheme, revised forms and direct payments to companies, claiming R&D tax relief should be simplified and a streamlined process.

“Whilst those companies previously claiming under the SME scheme will notice reduced rates under the new merged scheme, R&D tax claims still represent one of the most attractive tax reliefs available to companies with eligible expenditure”, says Paul Woodward.

We are yet to find out whether the Labour government will make any changes to R&D tax claims as there was no mention of this in their election manifesto. However, Labour’s Business Partnership for Growth document (February 2024) noted that the scheme would be retained. Expect to hear more in the next Budget announcement, which as of writing, has not yet been scheduled.

Contact us

Please contact us if you would like to discuss your R&D tax claim or how these changes impact you.