The UK R&D Tax Relief regime R&D Relief factsheet
The UK government has consolidated the previous R&D tax relief schemes—namely, the SME scheme and the R&D Expenditure Credit (RDEC)—into a single, unified framework. Referred to as ‘the merged scheme,’ this change aims to simplify the process, enhance compliance, and better support innovation across businesses of all sizes.
Key features of the merged scheme
- Unified Relief Structure
All companies, regardless of size, now fall under the merged R&D tax relief scheme. This unification streamlines the application process and ensures consistent treatment of R&D activities across the board.
- Expenditure Credit Rate
The scheme offers a taxable credit of 20% on qualifying R&D expenditure. After accounting for the 25% corporation tax rate, this results in a net benefit of 15% for profit-making companies.
- Enhanced Support for R&D-Intensive SMEs
Loss-making SMEs that are R&D-intensive—defined as spending at least 30% of total expenditure on qualifying R&D—can access the Enhanced R&D Intensive Support (ERIS). Under ERIS, these companies can claim a payable tax credit worth up to 14.5% of the surrenderable loss, leading to a potential cash benefit of approximately 27%.
Eligibility criteria
To qualify for the merged R&D tax relief, a company must:
- Be subject to UK corporation tax.
- Undertake qualifying R&D activities aimed at achieving scientific or technological advancements.
- Incur qualifying R&D expenditures, such as staffing costs, software, consumables, and certain subcontractor expenses.
For ERIS eligibility, the company must be an SME with R&D expenditure constituting at least 30% of total expenditure and be in a loss-making position.
Implications for overseas companies
International businesses planning to establish operations in the UK should consider the following:
- UK-Based R&D Activities: The scheme prioritises R&D activities conducted within the UK. Expenditures on overseas subcontractors are generally excluded unless specific conditions are met.
- Compliance Requirements: Companies must adhere to the new compliance measures, including submitting an Additional Information Form (AIF) detailing the R&D activities and expenditures, and Advanced Notification procedures.
Compliance and administrative considerations
The merged scheme introduces stricter compliance measures to mitigate fraud and errors:
- Additional Information Form (AIF): All R&D claims must be accompanied by an AIF, providing detailed information about the R&D projects and associated costs.
- Claim Notification Requirement: Companies must notify HMRC of their intention to claim R&D tax relief within six months of the end of the accounting period.
- PAYE Cap: The payable credit is subject to a cap based on the company’s PAYE and NIC liabilities, with a threshold of £20,000 plus 300% of the company’s PAYE and NIC liabilities.
Strategic considerations
- Maximising Relief: Companies should ensure that their R&D activities and expenditures are well-documented and clearly linked to the advancement of science or technology to maximize relief claims.
- Planning for ERIS: SMEs anticipating losses should assess their R&D intensity to determine eligibility for ERIS and plan accordingly to benefit from the enhanced support.
- Advanced Notification: Companies must notify HMRC of their intention to claim within 6 months of the company year-end. This condition is relaxed for companies that have claimed in the last three years (subject to exceptions).
- International Operations: Multinational companies should evaluate the location of their R&D activities, as the scheme favours UK-based R&D, potentially influencing decisions on where to conduct research.
Conclusion
The UK’s merged R&D tax relief regime represents a significant shift in how innovation is supported through tax incentives. By unifying the previous schemes and introducing enhanced support for R&D-intensive SMEs, the government aims to foster a more straightforward and equitable environment for businesses investing in research and development.
Companies, both domestic and international, should familiarise themselves with the new requirements and consider how best to structure their R&D activities to fully benefit from the available reliefs.
