Concerns remain over merging R&D tax relief schemes
While Research and Development (R&D) tax relief was introduced to encourage UK companies to make innovative investments that could boost the economy, the government is reforming this system due to concerns over fraudulent tax relief claims.
In addition to switching to online or digital submissions only and requiring more information for R&D tax relief applications from April 2023, the government announced in the November 2023 Autumn Statement that the Research and Development Expenditure Credit (RDEC) scheme and the small or medium enterprise (SME) R&D relief scheme would be merging into one from April 2024.
These two schemes will merge into a new scheme that is similar to the RDEC scheme currently used by large companies, which will eliminate the complexity of moving between schemes. This is designed to simplify the system and make it easier to ensure that companies can claim the right R&D relief they are entitled to more efficiently.
How does R&D expenditure credit (RDEC) work?
Alongside the R&D expenditure deduction, the RDEC offers a standalone 20% credit. As this is taxable, if the main Corporation Tax rate applies, then the credit is worth £15,000 for every £100,000 spent on research and development.
The expenditure credit could lead to repayments for loss-making companies, which would be calculated using the 19% profit rate of Corporation Tax.
If the credit is not used to reduce Corporation Tax liability for the current tax year, it is capped based on the PAYE and National Insurance contributions paid for research and development workers – but the cap from the SME scheme will be used in future, which is more generous.
What about R&D-intensive SMEs?
Small or medium enterprises can still claim a repayable 14.5% credit under the SME scheme, despite the merging of the two schemes. With an 86% uplift, this can result in a £26,970 cash repayment for every qualifying £100,000 of expenditure.
The intensity is calculated as a proportion of the SME’s qualifying expenditure compared to their total spending, with the R&D intensity threshold reduced to 30%.
There will be a grace period of 1 year for companies that fall below the new threshold.
Need help with R&D tax relief claims?
For more information on the expenditure credit scheme as it currently applies, HMRC’s RDEC guide is available to read on the government website.
The new scheme will apply for accounting periods starting on or after 1st April 2024.
If you want to make sure that your small to medium business, or company of any size, is compliant with the R&D relief rules and benefits from the most effective tax relief, you may want to consult with our accountants in Barnsley.