CIRD100000 – R&D Tax Reliefs: reformed reliefs: contents

As the landscape of R&D tax relief continues to evolve, HMRC has released detailed guidance on the new Merged Scheme, which will come into effect for accounting periods starting on or after 1 April 2024. This article explores the key aspects of the merged scheme, the Enhanced R&D Intensive Support (ERIS) scheme, and the updated subcontractor rules. For businesses navigating these changes, understanding the updates is crucial to maximising their R&D tax claims. The full guidance is indexed in the link above to CIRD1000000.

The Merged R&D Scheme

The Merged Scheme replaces the previous RDEC scheme and combines elements to streamline and broaden its applicability. Key features include:

• Applicability to All Companies: The scheme applies regardless of the company's size, offering a taxable credit (deemed trading income) based on qualifying R&D expenditure.
• Notional Tax Restriction Rate: A reduced rate benefits small profit-makers and loss-makers, improving the scheme’s accessibility.
• PAYE Cap Adjustments: A more generous PAYE cap allows businesses to claim a higher portion of relief.
• Subcontractor and EPW Payments: New limitations apply, particularly for overseas activity, ensuring a focus on domestic R&D efforts.
• Expenditure Exclusions: Contributions towards independent R&D are no longer claimable.

Claiming Under the Merged Scheme

To ensure compliance and maximise benefits, businesses must understand the eligibility criteria, calculate qualifying expenditure accurately, and adhere to the new reporting requirements. The rate remains at 20%, but with taxation at the main rate or a lower rate, the net benefit is approximately 15% or 16.2%.

The ERIS Scheme: A Lifeline for R&D-Intensive SMEs

The Enhanced R&D Intensive Support (ERIS) scheme is specifically designed for loss-making SMEs heavily engaged in R&D. Key details include:

• Eligibility Criteria: SMEs must demonstrate R&D intensity, defined as R&D expenditure exceeding 30% of total expenditure, including that of connected companies.
• Enhanced Relief:
  • Tax credit rate of 14.5%.
  • An additional deduction increases trading losses by 86% of qualifying R&D expenditure.
  • Optional surrender of losses for a non-taxable payable credit.
• PAYE Cap: The same PAYE cap applies as in the Merged Scheme.
• Subsidised Expenditure: Unlike the previous SME scheme, the ERIS scheme does not restrict subsidised expenditure, broadening its appeal.

Calculating ERIS Claims

To benefit, companies must carefully calculate their surrenderable loss—the lower of:

1. 186% of enhanced expenditure.
2. Unrelieved loss, factoring in potential reliefs.

Understanding the interplay of connected companies, total expenditure, and other reliefs is essential to making accurate claims.

Updated Subcontractor Rules

A significant change under the new guidance involves subcontractor and Externally Provided Worker (EPW) payments. These rules aim to prioritise UK-based R&D activities and introduce stricter conditions:

• Overseas Restrictions: Expenditure on subcontractors and EPWs performing R&D abroad is generally excluded unless specific exemptions apply, such as geographical or regulatory conditions preventing UK-based R&D.
• Connected Companies: Payments to connected subcontractors must meet stringent eligibility criteria.
• Evidence Requirements: HMRC mandates documentation, such as PAYE references, to substantiate claims involving subcontractor or EPW costs.

Practical Implications

For businesses relying on global R&D networks, these restrictions require a reassessment of expenditure and potential restructuring to align activities with HMRC’s criteria. Proper documentation and proactive planning are critical to ensure compliance.

Navigating the Changes

With the introduction of the Merged Scheme and ERIS, alongside the updated subcontractor rules, the R&D tax relief environment has become more complex. These changes emphasise the importance of:

• Accurate Documentation: Ensuring all claims are substantiated with clear evidence.
• Strategic Planning: Restructuring R&D activities to maximise eligibility.
• Expert Guidance: Leveraging professional advice to navigate the intricacies of the schemes and optimise claims.

At RandDTax, our team specialises in R&D tax relief claims. We stay abreast of regulatory changes to provide accurate, reliable advice tailored to your business needs.

Contact Us

If you have questions about the new rules or need assistance with your R&D tax relief claims, RandDTax is here to help. Contact us today to ensure your business fully benefits from the latest developments in R&D tax incentives.

Christopher Toms MA MAAT – Compliance Director RandDTax.