R&D Tax Relief: Navigating the New Merged Scheme in 2024

Summary of the New Landscape for R&D Tax Relief

With the introduction of both the Additional Information Form and Research and Development Advanced Notification Form in 2023, which can be seen in my recent article Research and Development new requirements and notification changes, 2024 marks significant changes to the Research and Development (R&D) tax relief landscape. The most notable is the new merged R&D scheme, designed to streamline and modernise relief for UK companies. While some aspects are still under draft legislation, here’s an overview of the key points businesses should consider.

The Merged R&D Scheme: What You Need to Know

Starting from accounting periods on or after 1st April 2024, the merged R&D scheme will be the only option for companies not eligible for the R&D intensive scheme. This scheme consolidates the former SME and RDEC schemes, leaning more towards the structure of the RDEC scheme. However, some elements of the SME scheme remain, such as the more generous cap for PAYE/NICs at £20,000 plus 300% of relevant PAYE and NIC liabilities.

Under the merged scheme, R&D tax relief will be provided as an above-the-line taxable credit, in line with the old R & D expenditure credit (RDEC) scheme. The relief rate is set at 20%, resulting in a post-tax benefit of 15% to 16.2%, depending on the company’s profits and applicable corporation tax rate (19% or 25%).

SME R&D Intensive Rate: Enhanced Support for Loss-Making SMEs

For loss-making SMEs where qualifying R&D expenditure constitutes at least 30% of total expenditure, the relief rate will remain generous. These SMEs will receive relief on costs plus 86% at a 14.5% credit rate, providing a 26.97% subsidy for their R&D investments.

Changes in Qualifying Expenditure Rules

The 2024 reforms also affect what qualifies as R&D expenditure. Now, all companies can claim subcontractor costs, provided the R&D work was expected or intended at the time of contracting. However, subcontractors themselves face stricter limits on their claims. In-house R&D remains claimable, as does work completed for customers where R&D was unexpectedly required to fulfil the contract. If the customer doesn’t have a taxable trade in the UK or is an ineligible company, the subcontractor can make the claim.

Please refer to the HMRC’s draft guidance for more detailed information.

Further changes are also anticipated regarding Externally Provided Workers (EPWs), likely limiting qualifying expenditure to PAYE and NIC earnings and restricting claims for overseas expenditure. More details on these legislative drafts can be seen here.

HMRC R&D Enquiries: A Growing Challenge

Since 2023, HMRC has increased its scrutiny of R&D tax relief claims, following the government’s announcement of additional resources to tackle perceived misuse of the scheme. This heightened focus has caused smaller R&D boutique firms to disappear or shift their focus to other areas, such as Capital Allowances. Even some high-profile clients of Big Four firms, with seemingly robust claims, have seen their applications denied by HMRC.

Now, more than ever, it is critical for companies to ensure their R&D tax claims meet the qualifying conditions set out by HMRC

Get in Touch

For expert advice on navigating the evolving R&D tax relief landscape and ensuring your business claims the maximum allowable relief, contact our R&D tax relief and credit specialists today.