Green light for a merged R&D tax relief scheme

Expenditure Treatment 

The merged R&D relief scheme will resemble the existing RDEC scheme whereby the credit will be treated as an above the line expenditure credit, calculated as a percentage of total R&D expenditure. This means the credit will be recognised as income within the P&L and can positively impact KPIs such as Earnings before Interest and Taxes (EBIT). The tax benefit calculation is far more straightforward, with taxpayers and tax-loss businesses receiving the same benefit. The only issue for SME business towards that have profits above £1.5m might have to watch out for is that this new credit will not form part of calculating quarterly instalment payments, as it sits outside the tax computation, which could cause a cashflow impact for the first claim under this new scheme.

Another area businesses will have to navigate is how to account for the credit and how this impacts the P&L figures for the company. Claimants under the SME scheme will be unfamiliar with these changes and may need extra support in the first year to ensure that the claim is booked and claimed correctly.

Subcontracted Costs

Under the RDEC scheme, companies could only reclaim costs for subcontracted R&D under specific circumstances, and in most cases, these costs were excluded. However, in the merged scheme, changes to the legislation allow all claimants to claim for expenditure incurred on contracted-out R&D activities. To prevent a double count of qualifying spend, the new scheme introduces an exclusion to prevent a company subcontracted to undertake R&D on behalf of another UK company from claiming under the new scheme. This rule does not apply for work subcontracted by an overseas company, and if the subcontractor initiates the R&D, it may still be able to claim. 

However, where the R&D is initiated by the subcontractor and does not form part of the contract, there may be scope to continue claiming for these activities. The rules around who can claim are complex and we would recommend organisations seek advice to avoid making a costly mistake. 

Overseas costs

The previously announced restrictions on overseas costs have also been introduced from 1 April 2024. Any expenditure on R&D activities undertaken outside of the UK will no longer be claimable unless the expenditure falls within the boundaries of some strict exemptions where it is not feasible to undertake the activities in the UK. Some examples that are not sufficient to claim for include: finding resources overseas for cost reasons, or increasing wages due to lack of resources in the UK. 

If you are unsure whether your activities fall within the exemption criteria, get in contact. We are more than happy to discuss the exemptions.

NIC/PAYE cap 

To prevent fraud, the NIC/PAYE payable credit cap was brought in as an anti-abuse measure. The merged scheme will adopt the more generous SME scheme cap, where the R&D credit will be subject to a cap of £20,000, plus 300% of the SME’s overall liability for NIC and PAYE in the claim period. This is a major improvement over the RDEC scheme and will make the merged scheme more beneficial.

What should you do?

With so many changes, organisations looking to claim for R&D tax relief under the new scheme will need to be careful and invest time to avoid any potential pitfalls. We encourage you to review your claims as soon as possible to identify where there might be overseas costs or subcontracted R&D complications. As the claim is now above the line, you should try to align the R&D claim work with other accounting or audit activities such that the benefit can be accurately recognised. 

If you are concerned about how to transfer your claim into this new scheme, please get in touch.

How we can help

We're here to fully support you with preparing and claiming R&D tax credits. Should you choose to get specialist R&D support from Buzzacott, we will:

• Identify what scheme your business qualifies for
• Carry out a comprehensive review of your R&D activity, working with you to ensure you are maximising your claim
• Prepare a claim that minimises your potential exposure to a HMRC enquiry
• Aim to fast track your claim and avoid delays in receiving your benefit
• Guide you through the whole claim process or on certain aspects of the claim.

We also work with you to assist in identifying other sources of R&D support and help with planning your R&D strategy, taking into account incentives and grants that might be available. By offering this holistic view of the innovation support needs, we can assist throughout the business lifecycle. Our R&D team at Buzzacott support businesses throughout the year, not just when it’s time to prepare the next R&D claim. 

We take time to listen to your business to understand the goal you’re trying to achieve with your innovation, so we can help you overcome problems and challenges along the way. By being open and honest, we aren’t afraid to challenge our clients to make sure that your claim is correct and you’ve optimised the benefit. We want to help you understand your eligible activities, without holding you up, so you know how to build a robust R&D claim.

Get in touch

If you would like to speak to one of our R&D experts to find out more about how we can help, please get in touch via the form below or call +44 (0)20 7710 3330.