Recent changes to the UK R&D regime - What you need to know

This significant change was designed to simplify the UK R&D tax relief system which, on the face of it, the announcement achieved. However, the introduction of an R&D-intensive regime for loss-making SME businesses means that there are still two regimes going forwards.

What is R&D?

R&D is a corporation tax relief, designed to reduce your company’s tax liability if you pay corporation tax. In certain circumstances, you may receive a tax credit (cash repayment).

A company is likely to qualify for R&D if it has undertaken a project that is:

a)    Aiming to achieve an advance in science or technology

b)    Working to resolve scientific or technological uncertainty

c)     The solution is not easily found by someone competent in the field.

In summary, if experienced people in the field have spent a significant amount of time and effort trying to overcome a challenge / issue which resulted in an advance in science of technology, the costs associated with the work required to solve the problem could qualify for R&D tax relief.

What is the MRDEC scheme?

The MRDEC scheme is a taxable credit (20% of the qualifying expenditure) and can be claimed by eligible trading companies within the charge to UK corporation tax.

The calculation and payment steps of the MRDEC scheme are broadly the same as those of the old RDEC scheme, but with two main differences. Firstly, a lower rate (19%) of notional corporation tax (Step 2) is available for small-profit and loss-making businesses (defined as companies with total profits chargeable to corporation tax of less than £50,000, excluding the RDEC claimed). Secondly, the more generous PAYE cap (i.e. £20,000 plus 300% of the companies relevant PAYE and NIC liabilities) applies.

Depending on the wider corporation tax position of the claimant company, the MRDEC scheme could provide a cash benefit of up to 16.2p for every pound of expenditure identified.

What is the ERIS scheme?

The ERIS is designed to support loss-making R&D incentives for SMEs by allowing them to claim under a regime that is more advantageous than those available for larger or less R&D-intensive businesses.

The calculation and payment steps of the ERIS are broadly the same as those of the old SME scheme. For example, the claimant company will receive an enhanced R&D deduction equal to 86% of its qualifying expenditure and will be able to surrender its relevant losses for a payable tax credit at 14.5%.

Depending on the wider corporation tax position of the claimant company, the ERIS scheme could provide a cash benefit of up to 27p for every pound of expenditure identified.

Overview of different R&D regimes

The table below provides an overview of the different R&D regimes, including the potential benefits of claiming under each regime:

What expenditure qualifies under the MRDEC and ERIS schemes?

Qualifying expenditure under the MRDEC scheme includes staffing costs, software and consumable items, contracted-out R&D, expenditure on externally provided workers, payments subject to clinical trials, and cloud computing and data storage costs.

Key differences between MRDEC and previous SME and RDEC regimes

The MRDEC scheme has brought about some key changes to the types of expenditure that qualify under the regime

• Subsidised expenditure: For accounting periods beginning on or after 1 April 2024, there is no restriction on claiming for subsidised expenditure.
• Contributions to independent research: For accounting periods beginning on or after 1 April 2024, this category of qualifying expenditure no longer exists.
• Subcontracted expenditure and contracted-out R&D: Under the MRDEC scheme, subcontracted expenditure and contracted-out R&D has become a complex area which will require a significant amount of care and attention when preparing R&D claims. In general, the company that made the decision to undertake the R&D, and that is therefore ultimately bearing the risk, will be entitled to make the R&D claim. As a result, subcontractors will only be able to make a claim for R&D tax relief under the MRDEC scheme in a limited number of circumstances, some of which are outlined below:
  • Where they are performing work under a contract where the other party is not able to make a UK R&D claim (e.g. the company is an overseas entity, a government body, or not subject to UK corporation tax).
  • Where the subcontractor’s internal R&D team undertakes qualifying activities that are not related to a customer contract.
  • Where the subcontractor can demonstrate that the customer did not intend to contract out the qualifying R&D activities at the time the contract was entered into.

In addition, from 1 April 2024, all qualifying subcontracted expenditure will need to be performed within the UK, with all qualifying externally provided worker payments subject to UK PAYE and Class 1 NICs. There are a few exceptional circumstances where oversees activities will be allowed:

• Where it is unreasonable to undertake the R&D in the UK due to geographical, environmental, or social factors.
• Where legal or regulatory requirements require the activity to take place in a specific territory, or
• In the case of certain SME businesses registered in Northern Ireland (subject to certain conditions being satisfied).

For completeness, the special rules in relation to pre-trading expenditure and group companies continue to apply to the MRDEC scheme.

New compliance requirements – Additional Information Form and Claim Notification Form

In addition to the above changes, we have also seen the introduction of more stringent compliance requirements in respect of R&D claims. Since 8 August 2023, there has been a requirement to submit a detailed additional information form to HMRC to support R&D claim submissions. If this is not submitted prior to the submission of the R&D claim, the claim will not be accepted by HMRC.

Furthermore, for accounting periods beginning on or after 1 April 2023, there is an additional compliance requirement to provide HMRC with a claim notification form within six months of the end of the accounting period. A company must submit the form if it has not made an R&D claim previously, or if its last claim was made more than three years before the last date of the claim notification period.

Contact Us

If you would like to find out more information in relation to the above, please get in contact with a member of our team or take our R&D self-assessment to check if your company is eligible to make a claim.