The two existing research and development (R&D) tax relief schemes are set to merge. However the newly created scheme will be similar to the R&D expenditure credit currently claimed mainly by large companies. 

The merger will remove the complexities when companies move between schemes. Although there will invariably be some who significantly lose out as a result of the changes.

The merged scheme and other changes will apply in relation to accounting periods beginning on or after 1 April 2024. 

R&D expenditure credit (RDEC)

Along with a deduction for the R&D expenditure itself, the RDEC provides for a 20% standalone credit. Since the credit is taxable, it is worth £15,000 for every £100,000 spent on R&D assuming the main rate of corporation tax applies. 

  • For loss-making companies, the expenditure credit can lead to a repayment.
  • When calculating the repayment, the notional tax rate applied will in future be the profit rate of corporation tax of 19%.

If not used to reduce the current year’s corporation tax liability, the expenditure credit – before any alternative use – is capped according to the amount of PAYE and national insurance contributions paid in respect of Research and Development workers. In future, the more generous cap from the SME scheme will be used.

R&D-intensive SMEs

Despite the merger, loss-making R&D-intensive small or medium-sized enterprises (SMEs) will still be able to claim a 14.5% repayable credit under the existing SME scheme.

  • Given there is an 86% uplift, this works out to a cash repayment of £26,970 for every £100,000 of qualifying R&D expenditure.
  • R&D intensity is calculated as the proportion of an SME’s qualifying Research and Development expenditure compared to total spending. The intensity threshold is to be reduced from 40% to 30%. 

Also, a one-year grace period will be introduced for companies that fall below the 30% threshold.

HMRC’s guide to the RDEC as it currently applies can be found here.

How can we help?

From 1 April 2024, the two existing R&D tax relief schemes are set to merge, but many SMEs are worried about the fall out. If this impacts you and you need guidance, please contact us on 01444 716946 or on 01273 963656, or alternatively email us here for help.