The newly merged scheme came into effect on 1st April 2024 and applies to all accounting periods beginning on or after this date. For a lot of companies, this did not apply until 2025.
For example, a company with a December year-end would continue to claim under the old SME scheme for its 2024 accounting period. But from 1st January 2025 onwards, it would fall under the new merged scheme. The R&D tax relief programme merged the two schemes, so it should be easier and have consistency across the board. But companies still need to be aware of different rules within the new merged scheme.
Under the newly merged scheme, the refundable R&D Tax Credit rates range from 15% to 16.2%. This is significantly lower than the previous SME Tax Credit rate but higher for large companies.
In addition to the introduction of the merged RDEC scheme, SMEs can also consider whether they qualify for the Enhanced R&D Intensive Support (ERIS) programme. This is available to SMEs whose qualifying R&D expenditure is at least 30% of total expenditure. Including that of any connected companies.
The ERIS programme applies to loss-making SMEs, as it enables them to earn a refundable Tax Credit equal to 27% of all eligible R&D expenditure. For many early-stage or innovation-driven companies, this relief can provide a vital source of cash flow and reinvestment back into the company.
Another R&D Major Change
Another major change is the elimination of the inclusion of Foreign R&D expenditures. Essentially, contract and externally provided workers who conduct R&D work outside the UK, will no longer qualify. This will affect companies contracting out R&D to companies or individuals in other countries. There are, however, some exceptions where it is not possible to conduct a particular R&D activity in the UK. As an example, where a company must carry out R&D trials under Arctic conditions and therefore must conduct the work in northern Norway, which requires local (foreign) contractors to do the trials, then these costs can be claimed.
The one big thing that benefits SME’s however is the elimination of subsidised R&D expenditures. For example, if you have received a UK Innovate or Smart Grant associated with an R&D project, you are now able to claim the entire R&D costs under that given R&D project under the new merged scheme.
One may ask “What is an R&D Subsidised Expenditure?”
Subsidised expenditure is where an R&D project has funding from a source other than the company undertaking the R&D activity. The current format of the SME scheme means that projects with subsidised expenditure are not eligible for the incentive and must claim under the RDEC scheme.
There are three primary types of R&D Subsidised Expenditures:
Notified State Aid
- Regardless of the level of funding received, where the company has received funding, it is classified as notified state aid, and the entire project the company is claiming must be claimed under the RDEC scheme.
Grants and Other Subsidies
- In this situation, an R&D project is deemed to be subsidised up to the value of the grant. As a result, a company would match the value received by the grant and would be required to be claimed under the RDEC scheme with the remaining or excess expenditure claimed under the SME scheme. CIRD81650 reinforces the point: “This may result in the expenditure qualifying for R&D tax relief partly under the SME scheme and partly under the large company scheme or RDEC.”
Costs Provided by an Individual or via Private Funding
- The final category is where funding for an R&D project is otherwise met directly or indirectly by a person other than the company. This is the area that has caused controversy within the incentive and saw HMRC take a significant departure from its previous interpretation of the legislation leading to tribunal cases to resolve the disagreement. The new guidance makes the subsidised test narrower in focus and applies only where a payment is linked to R&D activity.
As a result of the tribunal judgments, on 27th February 2025, HMRC issued updated guidance on subsidised expenditure within R&D projects. As already noted, the new guidance does not change the wording of the legislation. It simply provides HMRC’s own view of the legislation.
The rules have changed
With the new merged scheme taking affect, the rules have changed for accounting periods starting on or after April 1st, 2024. For R&D claims made going forward, the definition of a subsidised expenditure has now been removed. Essentially, this means that projects that are now funded can be claimed under the new merged scheme and the Enhanced R&D Intensive Support (ERIS). For example, if you are a grant-funded SME that had previously claimed under RDEC owing to subsidised expenditure, you may now be eligible for the higher rate under ERIS.
Find out more about the Newly Merged Scheme
I would invite you to get in touch with RDP Associates when it comes to your prior claims where the SME and RDEC schemes still apply, and given all relevant case law that has resulted, you could be in a position to resubmit your R&D Tax Credit claims with additional R&D expenditures. If you want to know more about the new merged scheme and how it may affect you, we are at your disposal.
To find more about the new rules, the newly merged scheme and / or having a chat with us to see if you are eligible to adjust your existing R&D tax relief claim(s) under the pre-April 1st 2024, rules, please contact Jenni at [email protected].