The Finance Act 2024 introduced changes for accounting periods starting on or after 1 April 2024, merging the SME scheme and RDEC (research and development expenditure credit) schemes (with a limited exception of ‘research-intensive’ SME companies), and the new scheme is now called ‘new RDEC’.
HMRC guidance for new RDEC regarding the following can be found within HMRC manual CIRD110000:
- calculation
- payment steps
- amount of qualifying expenditure
- applicable rates.
While referred to as a ‘relief’ in numerous places for convenience, the new RDEC is not strictly a tax relief but a taxable credit. It will be a taxable ‘above-the-line’ tax credit equal to 20% of the qualifying R&D expenditure, broadly using the same mechanics as the old RDEC.
In addition to the new RDEC scheme, another scheme ‘Enhanced R&D intensive support (ERIS)’ is introduced for ‘research-intensive’ SME companies, applicable from the same date.
The expenditure rules for both are the same, but the calculation is different. To claim either relief, the company needs to show how their project meets the tax definition of R&D for tax purposes.
Features of the new RDEC
There is a single set of rules for claimants of any size:
- the new RDEC remains a taxable credit (deemed trading income) calculated as a percentage of qualifying R&D expenditure
- the calculation and the payment steps are broadly similar to the old RDEC scheme; however:
- a lower rate of notional tax restriction at step 2 of the payment steps is available to small profit-makers and to loss-makers - CIRD112100
- a more generous PAYE cap applies at step 3 - CIRD140000
- expenditure on contributions for independent R&D can no longer be claimed for - CIRD82200
- subject to transitional provisions (CIRD165000), claimants generally:
- can claim for expenditure on R&D contracted out by them
- can't claim for expenditure on R&D contracted out to them
- the approach to defining when R&D is contracted out is different from both the old SME scheme and RDEC scheme - CIRD160000
- contractor and EPW payments are subject to overseas restrictions -CIRD150000.
…otherwise, the categories of qualifying expenditure remain substantially unmodified from the old RDEC.
Rate of relief
The effective amount of relief will depend on which rate the company pays tax at, ie 25%, 19% or the marginal 26.5% rate. If a company is paying corporation tax rate at the rate of 25%, it will receive relief at 15% of the R&D spend (20% above-the-line credit less the corporation tax rate). Similarly, the effective rate of relief will be 16.2% and 14.7% respectively for corporation tax payable at 19% and 26.5%.
Example
X Ltd undertakes qualifying activities and is within the charge of 25% corporation tax rate. Its qualifying expenditure for the year ended 31 March 2025 is £200,000. It can include an above the line credit of £40,000 (ie 20% of £200,000 of expenditure), leading to a corporation tax charge of £10,000. The credit is then deducted from the corporation tax liability, meaning overall relief is £40,000 – £10,000 = £30,000 (15% of £200,000).
If the company is loss-making, it can utilise the ‘surrenderable losses’ as calculated using the seven-step process used for RDEC. When working out the cash credit, a ‘notional tax deduction’ is now made at 19%, rather than 25%, which means a cash credit can be obtained up to 16.2% for surrendered losses.
Features of enhanced R&D intensive support (ERIS)
Enhanced Research and Development intensive support is based on the current SME scheme and qualifying loss-making R&D Intensive SME companies will enjoy an enhanced expenditure deduction of 86% (ie total of 186% deduction for qualifying costs) in calculating their adjusted trading loss, and a payable credit of 14.5%. This means SME companies will be able to surrender losses and claim a payable tax credit at 27% of qualifying spend deduction – (14.5% x 186%).
To qualify as a SME, an enterprise, being ‘any entity engaged in an economic activity, irrespective of its legal form’ must stay below the staff headcount limit and satisfy at least one of the turnover and balance sheet tests. The limits are as follows:
- staff headcount fewer than 500
- turnover not exceeding €100m
- balance sheet total not exceeding €86m.
Additionally, the entity must meet the R&D intensity condition, with an R&D intensity of at least 30% (40% before 1 April 2024).
As ERIS is available for SME intensive loss-making company (before the relief) only, so profit-making and non-R&D intensive SMEs with qualifying R&D expenditure can claim relief under the merged scheme instead.
What to do before submitting a claim
Before a company submits its claim, either R&D tax relief or expenditure credit in the Company Tax Return, it must:
- For accounting periods beginning on or after 1 April 2023, check if it needs to submit a claim notification form to notify HMRC in advance of its claim. Find out what it needs to provide when it tells HMRC that it is planning to claim R&D tax relief.
- From 8 August 2023 it must submit an additional information form to support its claim. Find out what information needs to be submitted, when and how to submit it.
R&D and going concern
Last but not least, if a company does not meet the condition of being a going concern, then it may not be eligible to claim the R&D relief. At a recent case at First-tier tribunal (FTT), MW High Tech Projects UK Ltd [2024] TC 09011, the taxpayer lost its appeal and the tribunal instead agreed with HMRC that a claim for the research and development expenditure credit (RDEC) was not valid as the company’s accounts show that it was not a going concern at the time of the claim.
Guidance on the claims process for both ERIS and new RDEC is available at CIRD180000
Useful resources
HMRC guidance on how to claim R&D tax relief under The merged scheme and enhanced R&D intensive support
