SME R&D Tax Credits to merge into RDEC

9th February 2024 | News

In recent years, the landscape of Research and Development (R&D) schemes has undergone a series of changes, and this trajectory is set to persist.

The Autumn Statement of 2023, as announced by Jeremy Hunt, revealed plans for the merger of the Small and Medium Enterprise (SME) scheme into the Research and Development Expenditure Credit (RDEC) scheme.

While this move is anticipated to streamline processes, it comes together with significant modifications, particularly in areas such as subcontracted R&D.

The changes

Commencing with company accounting years starting on or after 1 April 2024, the revised RDEC rules usher in a notable alteration in the treatment of subcontracted R&D.

Previously, SMEs acting as subcontractors on large company R&D projects could claim under RDEC, albeit with certain limitations.

However, under the merged RDEC scheme, the leading contractor in an R&D project can now include costs associated with hiring third-party contractors, eliminating R&D claims from SMEs acting as subcontractors to large entities.

A positive development arises with the removal of the subsidised R&D rule that previously applied to SMEs.

Historically, SMEs were required to bear the commercial risk in R&D projects claimed under the more generous SME scheme.

The absence of commercial risk, such as when R&D was subsidised by acting as a subcontractor or through grant funding, mandated claims under the less lucrative RDEC scheme.

The merged RDEC rules now allow SMEs undertaking subsidised R&D to make claims without a reduction in value, offering a more supportive framework for these entities.

In alignment with the new subcontracted R&D rules, SMEs engaged in subsidised R&D can now claim the costs of hiring third-party contractors to execute their R&D activities. This flexibility marks a departure from previous constraints, providing SMEs with greater financial latitude.

Notably, R&D carried out by subcontractors working for non-UK taxpayers, such as overseas companies, will still qualify for R&D relief, contributing to the global inclusivity of the scheme.

Objectives

While the government’s objective in merging the two schemes was to achieve greater simplicity, the landscape remains divided.

The latter caters specifically to R&D intensive SMEs, which are now defined as those where 30% of total annual expenditure is spent on qualifying R&D.

Although this is a reduction from the previous 40%, the dual-scheme structure persists, challenging the simplicity goal.

Despite the complexity, there is a silver lining for R&D-intensive SMEs, as they benefit from a higher claim rate of around 27p for every £1 spent on R&D.

This higher rate seeks to support loss-making companies with a significant focus on qualifying R&D activities.

Summary

However, the intricacies of the claim rates present a mixed picture.

Following the cut in SME claim rates from 1 April 2023, profitable SMEs claiming under the merged RDEC scheme will experience a reduction in claim values. The claim rate, previously at a maximum of 21.5p per £1 spent, will now align with the RDEC rate of approximately 15p per £1 spent on R&D.

In conclusion, while the changes to the R&D schemes aim to address certain complexities and provide additional support for specific categories of businesses, the continued existence of dual schemes introduces challenges in achieving the desired simplicity.

SMEs, especially those focused on R&D, find themselves navigating a landscape of nuanced claim rates and evolving eligibility criteria. As businesses adapt to these changes, a nuanced understanding of the revised rules becomes crucial to optimising R&D incentives.

How Williamson & Croft can help

Navigating the intricacies of the evolving R&D schemes requires a deep understanding of the revised rules and their implications.

At Williamson & Croft, we recognise the challenges businesses face in optimising R&D incentives amidst these changes.

Our team provides expert guidance, ensuring that businesses, especially SMEs, can make informed decisions to maximise their claims.

We offer tailored consultations to unravel the complexities of the merged RDEC scheme and the SME-intensive scheme, helping clients comprehend the nuances of claim rates, eligibility criteria, and the broader landscape of R&D incentives.

By leveraging our expertise, businesses can strategically position themselves to capitalise on the available opportunities and navigate the complexities with confidence.

Contact us today for more information.

Williamson & Croft is a market leading accountancy, advisory and tax firm with particular specialisms in property, construction, retail, digital and creative, technology and professional services.

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