SME and RDEC schemes are likely to merge

The unprecedented changes in the ever-changing R&D landscape must be confusing for many start-ups and scale-ups at the moment. While we still have no decision about the possibility of merging both SME and RDEC schemes into one, here is the latest news on the topic.

In January, the government consulted on the merger of the current SME and RDEC schemes into a new single scheme for R&D tax relief, for accounting periods beginning on, or after, 1 April 2024.  They committed to publishing draft legislation in the summer.

This draft legislation has now been published and a decision on whether to merge the schemes will be made at the next fiscal event.

The government has not made any final decision on what it plans to do. It may keep the schemes as they are, implement the proposed merged scheme or do something different.

Some of the main headlines from the proposal are below:

• A single R&D relief for the majority of companies to be delivered as an expenditure credit. This is proposed to be paid at a flat 20% gross credit which would be subject to corporation tax so the net benefit would be around 15%

• Loss-making, R&D-intensive SME companies (those spending more than 40% of their total expenditure on R&D) would still be able to access the previously announced enhanced rates for expenditure after 1st April 2024. This appears to create two R&D schemes, contrary to the aim of creating one merged scheme.

• As previously proposed, the draft legislation creates restrictions on overseas expenditure on subcontractors and EPWs. Qualifying overseas expenditure is only that which is undertaken overseas due to geographical, environmental, or social conditions not present or replicable in the UK.

• All companies will be able to claim for UK-based subcontractors. At the moment, SMEs are usually only able to include subcontractor spend as an eligible cost.

• No claim for an R&D expenditure credit can be made for costs which are subsidised; such as by a grant for example.

• Restrict Externally Provider Worker eligible costs to 65% of the staff providers’ relevant staff costs, rather than just 65% of the payment a company makes to the staff provider.

• The PAYE/NIC cap, by which a credit can be restricted, will adopt the more generous SME cap rules rather than the more restrictive RDEC ones.

We will keep you updated with more information as and when it is released.

Please contact Ben Rule if you would like to discuss any of the above or if you are seeking professional help regarding your R&D activities.