It’s amazing how quickly HMRC’s “merged R&D regime” has crept up on us, but it’s now here, and here to stay.
For companies with a December year-end the regime started on 1st January 2025 meaning your R&D claim for the year-ending 31 December 2025 must be filed under the new regime. Those with March year-ends will be submitting their claims for the year-ending 31 March 2025 under the regime soon.
We’ve been busy talking to our clients for a number of months to ensure they are aware of what the merged regime will mean for them. Even if they won’t be going through the claim process for a while, many need to be aware of the upcoming changes for budgeting and forecasting purposes.
We’ve summarised the main points below.
R&D MERGED REGIME
- When? The regime came into effect for accounting periods starting on or after 1 April 2024. Hence for 12-month accounting periods, the first claims impacted are for periods ending 31st March 2025.
- Rates: The rate offered under the merged regime is the RDEC rate of 20%. Like under the RDEC regime, the 20% credit under the merged regime is taxable. At the main tax rate of 25% this results in a net tax benefit of 15%. However, loss-making companies can apply a notional tax rate of 19% (instead of 25%) on the credit resulting in a net benefit of 16.2%. For companies previously claiming under the SME regime, there are differences to be aware of in terms of the accounts, namely ensuring the gross credit is recognised above the tax line.
- Overseas Restrictions: The restrictions on relief for expenditure on overseas externally provided workers (EPWs) and subcontractors came into effect at the same time, i.e. for accounting periods starting on or after 1 April 2024. To qualify, the work undertaken by EPWs and subcontractors must have taken place within the UK. There are some exemptions to explore but generally this will mean a decrease in claim size for those previously claiming overseas workers.
- Subcontracting: Under the merged regime, where a company subcontracts an R&D project, or a qualifying element of the project, the company contracting the work out can claim it as long as it was reasonable to assume that the claimant company intended or contemplated this sort of R&D would be undertaken. Hence the company contracted to actually carry out that work may not claim for R&D activities. However, if R&D wasn’t intended or contemplated, and the subcontractor had to undertake R&D of their own volition in order to meet the terms of the contract, then the subcontractor can claim. This expands the qualifying cost categories for RDEC claimants who can’t claim subcontracted R&D (apart from some exceptions). SMEs can currently claim under the RDEC regime for work subcontracted to them by a Large Company, however under the merged regime they might not be able to. This has big implications for sectors such as aerospace and automotive industries where supply chain companies are often reliant on work subcontracted to them. Determining whether the customer or the supplier is eligible to claim relief requires careful consideration of the facts in each situation and we would encourage claimants to review their contractual arrangements with this in mind.
- PAYE/NIC CAP: The merged regime uses the more generous version of the PAYE/NIC cap used in the SME regime, namely £20,000 plus 300% of the claimant company’s total PAYE and NIC contributions plus the PAYE and NIC contributions of connected EPWs or connected subcontractors at the level of their R&D involvement.
- Subsidised expenditure: There aren’t any restrictions relating to subsidised expenditure, for example where companies are in receipt of grants to fund their R&D. Currently restrictions apply for SMEs who typically are still able to claim under the RDEC regime (hence under the merged regime this won’t really change the net position for SMEs).
- Cost categories: Cloud, data and maths costs, which came into effect as new types of claimable costs from 1 April 2023, will continue to be eligible under the merged regime.
ENHANCED R&D INTENSIVE SUPPORT (ERIS)
- ERIS for R&D intensive loss-making SMEs was announced at the Spring Budget 2023 for R&D expenditure made on or after 1 April 2023.
- A company was originally considered to be R&D intensive where its qualifying R&D expenditure was 40% or more of its total expenditure. This amount reduced from 40% to 30% of total expenditure for accounting periods starting on or after 1 April 2024. Note that total expenditure includes that of worldwide connected companies so in our experience, only small stand-alone SMEs are usually able to benefit from this.
- The enhanced support allows R&D intensive SMEs to deduct an additional 86% of the R&D expenditure for tax purposes and surrender up to 186% at a rate of 14.5% for a cash credit.
- A year of grace can apply to help in situations where exceptional spending might skew a SME’s intensity ratio for a year which would have led to the business moving out of the intensive SME regime.
If you have any questions about the merged regime, please reach out to Chris Knott, Mark Frost, Donna Challinor or Caroline Hawkins.
