Merged RDEC and SME R&D scheme

Jeremy Hunt, the Chancellor of the Exchequer, confirmed on 22 November 2023, the much anticipated merger of the existing Research and Development Expenditure (RDEC) and SME R&D schemes from 1 April 2024. This merger simplifies into one scheme with aligned qualifying rules and a more visible above-the-line credit.

• The notional tax rate for loss-making companies under the merged scheme will be reduced from 25% to 19%, potentially increasing the amount of repayable credit. The current RDEC gross credit is 20% which is expected to remain the same under the new combined scheme.

By way of an illustration, a loss making company with £1m of qualifying expenditure would receive a gross above-the-line-credit of £200,000. Applying the reduced notional tax rate of 19% to this amount would give a £162,000 net credit (instead of the current notional tax rate of 25% which would give £150,000).

• More companies should also benefit from the additional tax relief for R&D intensive loss-making SMEs by lowering the intensity threshold from 40% to 30%
• From 1 April 2024, R&D claimants will no longer be allowed to nominate a third-party payee for R&D tax credit payments, with limited exceptions in a bid to prevent fraud and non-compliance. This is to ensure companies and HMRC have full oversight of the claim, and repayments are processed more quickly.
• The government announced the closure of the review into the R&D schemes by the merging of the SME R&D scheme into the RDEC scheme.
• There is still quite a lot of detail on the design yet to be received particularly on how subcontracting will be treated with the government suggesting a clearer distinction will be made between ‘contracts for services’ and ‘contracted out R&D’
  • Under the RDEC scheme, companies can only claim on subcontracted expenditure to qualifying bodies, individuals, or partnerships of individuals.
  • Under the SME scheme, companies can claim more widely for qualifying payments to most subcontractors.
  • Further changes are expected from 1 April 2024 to restrict expenditure on payments to subcontractors on UK expenditure, or qualifying overseas expenditure.

• The government also recognised the need for further action to curb non-compliance in claims for R&D tax reliefs, HMRC will release a compliance action plan.

Additional tax relief for R&D intensive SMEs – watch this space!

This article was correct at time of publication.

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