The Merged R&D Tax Credit Scheme - What You Need to Know
R&D tax credits can be a valuable source of funding for innovative UK businesses. However, the current system can be confusing and difficult to navigate. In response, HMRC has proposed the consolidation of the two current R&D tax credit schemes into one simplified scheme effective from 1st April 2024, which will make it easier for companies to claim R&D tax credits.
In this article, we will explore the potential benefits of a merged R&D tax credit scheme, why the government is considering it, and what will happen if it is implemented.
What is a Merged R&D Tax Credit Scheme?
Currently, there are two R&D tax credit schemes available in the UK: the SME scheme and the R&D expenditure credit (RDEC) scheme. The SME scheme is designed for small and medium-sized enterprises, while the RDEC scheme is available for larger companies (or SMEs that are grant funded).
The SME R&D Tax Credit Scheme offers a tax credit of up to 18.6% of qualifying R&D expenditure, or if a company spends 40% or more on R&D qualifying expenditure an enhanced 27% would apply as it would be considered "R&D intensive". To qualify for the SME scheme, a company must have fewer than 500 employees and either an annual turnover of less than €100 million or a balance sheet of less than €86 million.
The RDEC scheme, on the other hand, offers a tax credit of up to 20% of qualifying R&D expenditure. The credit is calculated as a percentage of a company’s qualifying R&D expenditure and is claimed as an above-the-line credit in the company’s accounts.
Overall, while both the SME R&D Tax Credit Scheme and the RDEC Scheme offer tax credits for research and development activities, they are designed for different types of companies and offer different levels of tax relief. It is important for companies to assess which scheme is best suited to their needs and to ensure they are maximising their R&D tax relief claims (but of course, Accountancy Cloud can help you decide and determine your eligibility.)
Why is the Government Considering Merging the R&D Schemes?
There are several reasons why the government is considering merging the two R&D tax credit schemes into a single scheme:
1. Simplify R&D Tax Relief
One of the primary reasons for consolidating the two schemes is to simplify the process of claiming R&D tax relief. The UK currently has two R&D tax credits schemes, which can be confusing for companies to navigate. A single scheme would make it easier for companies to claim R&D tax credits and encourage more businesses to invest in research and development. The proposed merged scheme aims to simplify the current system and by consolidating the two schemes into one, it can offer a straightforward above-the-line credit system that streamlines the process of claiming R&D tax credits.
2. Give More Visibility to Decision-Makers
The government believes that a merged R&D tax credit scheme would provide greater visibility for decision-makers. With RDEC, companies receive relief as an “above-the-line credit”, which offers greater certainty than the SME scheme. This means that companies can receive more accurate calculations of their R&D tax relief and budget for future R&D expenditure. This would help to make R&D tax relief more attractive to investors, who can factor the credit into their investment decisions.
3. Drive Investment in the UK Economy
The UK government is keen to encourage more investment in the UK economy. Research has suggested that the RDEC scheme is more likely to stimulate private research and investment than the SME scheme. By consolidating the two schemes, the government hopes to encourage more investment in research and development across the country.
4. Make it Easier for Claimants
The current system can be confusing for businesses to navigate, and there are ambiguities between the two schemes that can cause confusion. By consolidating the two schemes, the government hopes to reduce these ambiguities and make it easier for companies to claim R&D tax credits.
5. Reduce Fraud
Fraud and errors in the current R&D tax credit schemes are estimated to be costing the government millions of pounds. By simplifying the system, the government hopes to reduce the level of fraud and errors associated with the current schemes.
6. Deliver Value for the UK Taxpayer
Ultimately, the government is keen to deliver value for the UK taxpayer. The proposed merged R&D tax credit scheme is expected to deliver better value and save money in the long run. The government estimates that the RDEC scheme incentivises more R&D investment than the SME scheme, making it a more cost-effective solution for the UK taxpayer.
What Will Happen if a Merged Scheme Launches?
If the proposed merged R&D tax credit scheme is implemented, it will simplify the current system and make it easier for businesses to claim R&D tax relief. However, there will be some changes to the current system that companies will need to be aware of.
The government is aiming to have the merged scheme in place for expenditure incurred from 1 April 2024. Before this can happen, they will need to announce more details on the design and eligibility for the scheme, along with a final R&D tax credit rate.
Companies that are currently claiming R&D tax credits will need to consider how the new scheme will impact their claims. They will need to assess whether the merged scheme will offer them more or less relief than they currently receive under the SME or RDEC schemes. It is important for businesses to stay up-to-date with any changes to the system to ensure they are maximising their R&D tax relief claims.
If you are a UK-based business that is currently investing in research and development, it is important to stay up-to-date with any changes to the R&D tax credit system. Keep an eye on any announcements from HMRC regarding the proposed merged R&D tax credit scheme and assess how it may impact your business.
Consider working with an experienced R&D tax credit advisor who can help you navigate the system and maximise your claims. With the potential for significant changes on the horizon, now is the time to ensure that your business is making the most of the R&D tax relief available to you. Speak to us and we'd be able to provide advice and guidance on the latest changes.
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