Getting to grips with five different R&D tax relief schemes
by Richard Edwards is CEO of The R&D Community
The recent overhaul of R&D tax relief schemes has done little to simplify the rules as users now have to grapple with no less than five schemes. Richard Edwards, CEO of R&D Community, explains the key differences.
April 2024 saw the introduction of a new merged and enhanced research and development (R&D) intensive scheme (ERIS). This was on top of the gap-filling R&D intensive scheme and leaves you wrestling five sets of rules for R&D tax relief. Yes, really – five.
You will no doubt be familiar with both the SME scheme and R&D expenditure credit (RDEC), the two long standing schemes for R&D tax relief. The Merged R&D scheme has been pretty well publicised as a combination of the old SME and RDEC rules.
But the other two schemes, the ‘R&D intensive scheme’ and enhanced scheme known as ERIS, apply to a much smaller number of companies, and many who do not work in R&D every day may not have seen much about them.
Because of the variety of schemes, and the similarities and overlap which occur, it can take a little time to unpick exactly which scheme applies to which type of business.
Let’s break them down one at a time and highlight the key criteria to understand them better.
Thankfully the definition of R&D is unchanged and consistent across all the R&D schemes. As well as that, the basic eligibility criteria for the schemes are all the same:
- companies must have conducted qualifying R&D within the accounting period;
- they must pay corporation tax; and
- they must be a going concern at the time of the claim.
Beyond that though, there are lot more specifics.
For accounting periods which began before 1 April 2024, large companies had to claim R&D through RDEC. Compared with the SME scheme, RDEC is less affected by grants and subsidies, but is also less generous and more complex in terms of calculating the relief.
The SME scheme is also only available for accounting periods that began before 1 April 2024. It is available to companies that meet the SME tests, which are:
- fewer than 500 full time equivalent (FTE) employees; and
- either a turnover of less than €100m (£84m) OR balance sheet assets of less than €86m (£72m).
The scheme was also a ‘Notified State Aid’ under EU rules – a kind of funding which has certain restrictions.
If the company claiming relief had already received another Notified State Aid for the project, such as a UK government grant, they were not eligible for the SME scheme and instead had to claim through RDEC, which is not affected by subsidised expenditure.
This very short-lived scheme was announced in the 2023 Spring Budget after pushback against the cuts to the SME scheme announced the previous autumn. It allowed SMEs who meet specific criteria to continue claiming the higher tax credit rate they had enjoyed for earlier accounting periods.
These companies had to be loss making (after the enhanced deduction for R&D), and 40% of their total relevant expenditure must be on R&D.
The rate only applies to expenditure incurred after 1 April 2023, so if a company’s accounting period straddles this date, a more complex accounting treatment is needed.
All the other rules of the SME Scheme regarding grants and so on will still apply.
For accounting periods beginning on or after 1 April 2024, the Merged R&D Scheme is the new ‘catch all’ – it applies to the vast majority of companies which would have claimed through either RDEC or the SME scheme in previous accounting periods.
The concept of notified state aid is no longer relevant due to the UK’s departure from the EU, so there is no restriction on grant funded work. There are, however, some new rules about what expenditure qualifies, particularly overseas expenditure.
The fifth and final scheme is ERIS – which also applies to accounting periods beginning on or after 1 April 2024. It has strictly limited criteria. First, companies must meet all the earlier criteria of an SME as per the old SME scheme.
These companies also have to be loss making (but now before the enhanced deduction for R&D) and 30% of their total relevant expenditure must be on R&D – which is less than in the R&D Intensive Scheme.
Given the similarities between these two, it is easy to get the details muddled, especially when discussing when moving from the R&D Intensive Scheme to ERIS.
If a company qualifies for ERIS it is important to double check the return against what they could expect to receive back via the Merged Scheme.
In some cases, loss-making SMEs that are close to break-even may be financially better off by claiming through the Merged Scheme.
There is, of course, far more to write about applying the new rules than can squeeze into one article, so you’ll want to do some further reading.
There are plenty of resources available including the free course An Advisor’s Essential Guide to the Merged R&D Schemeto get you started.
