Getting to grips with Research and Development (R&D) – which now seems to have 5 schemes

Getting to grips with Research and Development (R&D) – which now seems to have 5 schemes

The changes which came into effect for R&D in April 2024, as per our previous blogs,  saw the introduction of a new merged and enhanced research and development intensive scheme (ERIS). This was on top of the R&D intensive scheme and leaves you now with five sets of rules for R&D tax relief. Yes – five.

Businesses will be familiar with both the SME scheme and R&D expenditure credit (RDEC), the two long standing schemes for R&D tax relief. The Merged R&D scheme has been pretty well publicised as a combination of the old SME and RDEC rules.

But the other two schemes, the ‘R&D intensive scheme’ and enhanced scheme known as ERIS, apply to a smaller number of companies, and many who do not work in R&D every day may not have seen much about them.

Because of the variety of schemes, and the similarities and overlap which occur, it can take a little time to unpick exactly which scheme applies to which type of business.

The following has been put together to assist…

What do all schemes have in common?

The definition of R&D has not changed or the basic eligibility criteria for the schemes which are all the same:

• companies must have conducted qualifying R&D within the accounting period;
• they must pay corporation tax; and
• they must be a going concern at the time of the claim.

Beyond that though, there are lot more specifics.

When to claim through RDEC

For accounting periods which began before 1 April 2024, large companies had to claim R&D through RDEC. Compared with the SME scheme, RDEC is less affected by grants and subsidies, but is also less generous and more complex in terms of calculating the relief.

When to claim through the SME scheme

The SME scheme is only available for accounting periods that began before 1 April 2024. It is available to companies that meet the SME criteria, which is:

• fewer than 500 full time equivalent (FTE) employees; and
• either a turnover of less than €100m (£84m) OR balance sheet assets of less than €86m (£72m).

The scheme was also a ‘Notified State Aid’ under EU rules – a kind of funding which has certain restrictions.

If the company claiming relief had already received another Notified State Aid for the project, such as a UK government grant, they were not eligible for the SME scheme and instead had to claim through RDEC, which is not affected by subsidised expenditure.

When should a company claim through the R&D Intensive Scheme

This very short-lived scheme was announced in the 2023 Spring Budget after pushback against the cuts to the SME scheme announced the previous autumn. It allowed SMEs who meet specific criteria to continue claiming the higher tax credit rate they had enjoyed for earlier accounting periods.

These companies had to be loss making (after the enhanced deduction for R&D), and 40% of their total relevant expenditure must be on R&D.

The rate only applies to expenditure incurred after 1 April 2023, so if a company’s accounting period straddles this date, a more complex accounting treatment is needed.

All the other rules of the SME Scheme regarding grants and so on will still apply.

When should a company claim through the Merged R&D Scheme

For accounting periods beginning on or after 1 April 2024, the Merged R&D Scheme is the new ‘catch all’ – it will apply to the vast majority of companies which would have claimed through either RDEC or the SME scheme in previous accounting periods.

The concept of notified state aid is no longer relevant due to the UK’s departure from the EU, so there is no restriction on grant funded work. There are, however, some new rules about what expenditure qualifies, particularly with regards to overseas expenditure.

When to claim through ERIS

The final scheme is ERIS – which also applies to accounting periods beginning on or after 1 April 2024. It has strictly limited criteria. First, companies must meet all the earlier criteria of an SME as per the old SME scheme.

These companies also have to be loss making (but now before the enhanced deduction for R&D) and 30% of their total relevant expenditure must be on R&D – which is less than in the R&D Intensive Scheme.

Given the similarities between these two, it is easy to get the details muddled, especially when discussing moving from the R&D Intensive Scheme to ERIS.

If a company qualifies for ERIS it is important to double check the return against what they could expect to receive back via the Merged Scheme.

In some cases, loss-making SMEs that are close to break-even may be better off claiming through the merged scheme.

If you are not sure if you qualify for R&D and would like to chat about the schemes – please get in touch with us here at Kennedys Accounting for further details.