From April 2024, significant changes to this scheme came into effect, aimed at simplifying the process and providing enhanced support for R&D-intensive companies. Here’s a detailed look at how the R&D tax relief scheme will work under the new rules.
The merged scheme
One of the most significant changes is the merging of the two existing R&D tax relief schemes: the Small and Medium-sized Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme. This unified scheme is designed to streamline the application process and ensure consistency in the relief provided.
Eligibility criteria
To qualify for R&D tax relief, a project must aim to make an advance in science or technology. This involves resolving scientific or technological uncertainties that cannot be easily solved by a professional in the field. The project must also be relevant to the company’s trade, either existing or intended.
Types of relief
Under the new merged scheme, there are two main types of relief available:
R&D Expenditure Credit (RDEC): This is available to all companies, regardless of size. The RDEC rate has been set at 20%, and it is taxable, considered as trading income for Corporation Tax purposes.
Enhanced R&D Intensive Support (ERIS): This is specifically targeted at loss-making SMEs that are heavily invested in R&D. To qualify for ERIS, a company must have at least 30% of its total expenditure dedicated to R&D activities. ERIS allows these companies to deduct an extra 86% of their qualifying R&D costs, on top of the 100% deduction already available, making a total of 186% deduction. Additionally, eligible companies can claim a payable tax credit worth up to 14.5% of the surrenderable loss, which is not liable to tax.
Qualifying costs
The following costs can typically be claimed under the R&D tax relief scheme:
Staff costs: Salaries, wages, Class 1 National Insurance contributions, and pension fund contributions for staff directly involved in the R&D project.
Consumables: Materials and utilities used in the R&D process.
Software: Software used directly in the R&D activities.
Subcontracted R&D: A portion of the costs for R&D activities subcontracted to other organisations.
Clinical trials: Costs associated with clinical trials for pharmaceutical companies.
Claiming R&D tax relief
To claim R&D tax relief, companies need to follow these steps:
Determine eligibility: Ensure the project meets the criteria for R&D.
Submit a pre-notification form to HMRC
Identify qualifying costs: Calculate the qualifying R&D expenditure.
Submit a claim: Include the R&D claim in the company’s Corporation Tax return (CT600) and provide a detailed report explaining the nature of the R&D activities and how they meet the criteria.
Conclusion
The reforms to the R&D tax relief scheme effective from April 2024 represent a significant shift in how the UK supports innovation. By merging the existing schemes and introducing enhanced support for R&D-intensive SMEs, the government aims to foster a more innovative and competitive business environment. Companies engaged in R&D should take advantage of these changes to maximise their tax relief and reinvest in further innovation.
If you have any questions or need further details on how these changes might affect your business, please contact one of our experts.