Guest post by John Mapother
The UK’s R&D tax relief landscape is undergoing significant changes, with the introduction of the ‘Merged R&D’ scheme poised to reshape how businesses claim support for innovation.
This reform, coming into effect for accounting periods commencing on or after April 1 2024, consolidates the existing R&D Expenditure Credit (RDEC) and SME R&D relief schemes into a single, unified system.
While the government claims that the move simplifies and streamlines the process, SMEs must grasp how these changes will affect their ability to claim tax relief for essential research and development.
For many SMEs, R&D tax relief has been a vital source of financial support, especially for those operating on tight margins while developing innovative products and solutions.
However, with the new merged scheme aligning SMEs with the less generous RDEC framework, many business owners are concerned that the benefits they previously relied upon may be diminished.
Under the old system, SMEs could deduct 186% of their qualifying R&D expenditure from taxable profits. If they were loss-making, they could surrender losses for a cash credit of 10%—previously 14.5% before the April 2023 rate cut.
These changes aim to combat fraudulent claims; however, they also impose an administrative burden on businesses that may already struggle with complex reporting obligations
Consequently, SMEs could reclaim up to 27p for every £1 spent on qualifying R&D, or up to 18.6p in cash for loss-making businesses. This relief was crucial for sustaining innovation and reinvesting in future projects.
In contrast, large companies operated under the R&D Expenditure Credit (RDEC) scheme, which provided a taxable credit at 13%, increasing to 20% from April 2023. The net benefit, after tax, ranged from just over 10% to 15%, making it significantly less generous than the SME scheme.
With the introduction of the Merged R&D scheme, all businesses will now claim relief under a single framework that offers a 20% expenditure credit rate. While this eliminates the disparity between SMEs and large companies, it significantly reduces the level of relief for many smaller businesses that previously benefited from the more generous SME scheme.
Some support remains for those classified as R&D-intensive — businesses that spend over 40% of their total costs on R&D — who will receive a higher payable credit of 14.5%.
However, many SMEs that engage in meaningful innovation but fall below this threshold will observe a substantial reduction in relief.
Another major change is the removal of R&D tax credits for overseas subcontracting unless businesses can demonstrate compelling commercial or regulatory reasons for outsourcing.
This presents challenges for those that rely on specialist expertise outside the UK, as they may need to restructure operations to ensure qualifying work remains within domestic borders.
The government has also introduced stricter compliance measures, including mandatory digital submissions and pre-notification requirements for new claimants. These changes aim to combat fraudulent claims; however, they also impose an administrative burden on businesses that may already struggle with complex reporting obligations.
Alongside a reduction in relief, SMEs may find cash flow implications to be a significant concern. Many businesses that previously relied on a more generous tax credit to reinvest in their R&D efforts may need to revise their financial planning in light of lower returns.
While the government maintains that the new scheme is intended to be fairer and simpler, for many small businesses, it signifies a more challenging path to securing funding for innovation.
SMEs must act now to comprehend their standing, investigate alternative funding options, and adapt their financial planning accordingly. The new scheme may simplify the overall process, yet for many small businesses, the path to innovation has just become more challenging.
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`By John Mapother, founder and director of Vantage R&D Consulting
