Research and Development (R&D) tax relief: the merged scheme and enhanced R&D intensive support
How to claim the new merged scheme R&D expenditure credit (RDEC) and enhanced R&D intensive support for accounting periods beginning on or after 1 April 2024.
R&D tax relief supports companies that work on innovative projects which meet the tax definition of R&D. To qualify as R&D, a project must seek an advance in a field of science or technology.
You cannot claim if the advance sought is in:
- the arts
- humanities
- social sciences, including economics
The merged scheme R&D expenditure credit (RDEC) and enhanced R&D intensive support (ERIS) replace the old RDEC and small and medium-sized enterprise (SME) schemes for accounting periods beginning on or after 1 April 2024. The expenditure rules for both are the same, but the calculation is different.
To claim either relief, you need to show how your project meets the definition of R&D for tax purposes.
Merged Scheme — R&D expenditure credit
The merged scheme RDEC is a taxable expenditure credit and can be claimed by eligible trading companies within the charge to UK Corporation Tax (CT). You can choose to claim under the merged scheme instead even if you are eligible for ERIS, but you cannot claim under both schemes for the same expenditure.
The RDEC is liable to corporation tax as it is deemed to be trading income.
The calculation and the payment steps of the merged scheme RDEC are broadly the same as the old RDEC scheme, however:
- a lower rate of notional tax restriction at step 2 of the payment steps is available to small profit-makers and loss-makers
- a more generous PAYE cap applies
Whether your company makes a profit or loss, some or all of the expenditure credit may be used to pay your company’s or other group companies’ Corporation Tax liabilities.
In some circumstances the expenditure credit can:
- be used to pay other tax liabilities your company is liable for
- lead to a payment of credit to your company
RDEC — rates
For expenditure under the merged scheme, the rate of RDEC is 20%. This is the same as the rate under the old RDEC scheme for expenditure incurred on or after 1 April 2023.
For loss-makers and small profit-makers — that is, for companies with total profits chargeable to Corporation Tax of less than £50,000, excluding the RDEC claimed — a lower rate of notional tax restriction (currently 19%) applies at payment step 2.
For all other companies, the restriction will continue to apply at the Corporation Tax main rate (currently 25%).
Different rates apply to ring-fenced trades.
Enhanced R&D intensive support
ERIS allows loss-making R&D intensive SMEs to:
- deduct an extra 86% of their qualifying costs (additional deduction) in calculating their adjusted trading loss, as well as the 100% deduction which already appears in the accounts (or by virtue of s1308 CTA 2009 if that option is taken), to make a total of 186% deduction
- claim a payable tax credit, which is not liable to tax and which is worth up to 14.5% of the surrenderable loss
Companies registered in Northern Ireland should also refer to Research and Development (R&D) Tax Relief: Enhanced R&D intensive support for loss-making SMEs based in Northern Ireland.
To determine if you are a SME — read guidance at CIRD91000.
An SME is loss-making if it makes a loss for tax purposes before the additional deduction is taken. Unless you have such a loss, you won’t be entitled to that deduction or any payable tax credit.
To claim under ERIS, you have to meet the intensity condition. Generally, you will need to meet the condition for the period for which the claim is made. There is also a grace period, which means you can claim if you met the condition in your last 12-month accounting period and made a valid claim to SME relief or ERIS in that period on expenditure incurred on or after 1 April 2023.
Profit-making and non-R&D intensive SMEs with qualifying R&D expenditure can claim relief under the merged scheme instead.
If you’re making your first ERIS claim, you may be able to apply for advance assurance.
Intensity condition
A company meets the intensity condition, for an accounting period beginning on or after 1 April 2024, if its relevant R&D expenditure (plus that of any connected companies) is at least 30% of its total relevant expenditure (plus that of any connected companies). The periods you need to consider are:
- for the claimant company, the accounting period for which the claim is made
- for any worldwide connected companies, the period of time covered by the accounting period of the claimant company for which the claim is made — a company is connected if it was connected on any day during the accounting period
For further guidance on connection read CIRD82150.
You will need to identify the expenditure that relates to the periods under consideration. For accounting periods aligned with the accounting period of the claimant, you should use the exact figures for that accounting period.
Where there is a mismatch of accounting periods between the claimant and one or more connected company, or where a connected company is overseas (and so has no accounting period for UK tax purposes), you should use a reasonable method to attribute expenditure of the connected company to the period of time covered by the accounting period of the claimant company for which the claim is made. In certain circumstances it may be appropriate to apportion expenditure on a time (day) basis. But in other cases it will be necessary to have regard to when expenditure was incurred to give a fair result, for example, where R&D expenditure is incurred unevenly through a period. Any basis you adopt should be used consistently, and should fairly reflect the underlying economic reality.
Relevant R&D expenditure is expenditure on which R&D relief could be claimed for the period, whether or not a claim is actually made. Generally, it must also form part of the total relevant expenditure. Please note that only trading companies chargeable to UK corporation tax (or companies eligible to claim relief for pre-trading expenditure under s1045 CTA 2009) can have relevant R&D expenditure.
Total relevant expenditure includes:
- expenditure that is brought into account under Generally Accepted Accounting Practice (GAAP) in calculating the profits of a trade. If your accounts are prepared correctly under GAAP, this will be expenditure that feeds into the profit before tax in your profit and loss account or income statement
- if pre-trading, any pre-trading expenditure on which relief would be available under s1045 CTA 2009
- any amounts deducted in the tax computation under s1308 CTA 2009
It doesn’t include:
- any amount of amortisation added back in the tax computation under s1308 CTA 2009
- any expenditure which consists of a payment, or other transfer of value, to another company with which the company is connected
ERIS — rates
The rate of the additional deduction is 86%.
The tax credit rate is 14.5%.
Check what expenditure qualifies
Before you make a claim for ERIS or for RDEC under the merged scheme, check that:
- you have incurred expenditure as part of a project which seeks to make an advance in science or technology
- the project meets the definition of R&D for tax purposes
- the expenditure is of a type which qualifies for relief, as listed in the section ‘Which expenditure qualifies for relief’
Which expenditure qualifies for relief
You can claim either R&D relief on some of the costs you incur from the start to the end of the R&D project. It applies equally to ERIS and to the new merged scheme RDEC.
R&D starts when work begins to resolve the scientific or technological uncertainty and ends when that uncertainty is resolved, or the work to resolve it stops.
These sections will tell you which costs you can and cannot claim for.
Subsidised expenditure
Unlike in the relief for SMEs available before April 2024, there is no restriction on claiming for subsidised expenditure under the merged scheme or ERIS.
Contracted out R&D and subcontractor costs
The approach to contracted out R&D for accounting periods beginning on or after 1 April 2024 is different from the approaches used in both the old RDEC and SME schemes. It is the same for both the merged scheme and ERIS.
The general rule is that the party who takes the decision to undertake R&D will be able to claim.
You can claim for the costs of contracting out your own R&D to another person, but you will need to be able to demonstrate that you intended or contemplated that R&D of that sort would be done. You can claim 65% of a payment made for R&D to an unconnected contractor. Connected contractor costs are subject to additional rules, but may be claimable up to 100% if all conditions are met.
Contracted out costs are subject to a restriction preventing them from qualifying where the activity takes place abroad, with some exceptions.
HMRC has issued draft guidance on what is and is not contracted out R&D, and on overseas expenditure, and sought views on this. A final version of this guidance is currently being prepared and will be published shortly.
Transitional provision — if a contractor is still able to claim for the work they do for you under the old RDEC scheme, you will not be able to claim.
You can also claim for work which meets the tax definition of R&D and which you have done to fulfil a contract, but normally only if this work does not constitute R&D contracted out to you, if your company took the initiative to do R&D. This means that the ultimate customer must not intend or contemplate that R&D of that sort would be done to fulfil the contract. If your customer is ineligible to claim, for example because it is a non-UK company, you may still be able to claim relief.
Transitional provision — if a customer is still able to claim for the work they are paying you to do for them under the old SME scheme, you will not be able to claim.
You can only claim for expenditure which you incur on paying overseas contractors to undertake work on your behalf in limited circumstances.
Transitional provision — where neither the customer or the supplier would otherwise be able to claim because one is under the new rules and the other is under the old rules, the legislation modifies the new rules to ensure that one party can claim.
Consumable items
You can claim for the relevant proportion of consumable items used up in the R&D, this includes:
- fuel
- materials
- power
- water
You cannot claim the costs if you sell or transfer ownership of the consumable items used up in the R&D in the ordinary course of your trade.
Clinical trials volunteers
For R&D projects in the pharmaceutical industry, you can claim for payments made to the subjects of clinical trials.
Contributions for independent R&D
For accounting periods beginning on or after 1 April 2024, this category of expenditure no longer exists.
Data licence and cloud computing
For accounting periods beginning on or after 1 April 2023, qualifying expenditure is extended to include the relevant elements of data licence costs and cloud computing costs.
A data licence is a licence to access and use a collection of digital data.
Cloud computing includes:
- data storage
- hardware facilities
- operating systems
- software platforms
You can claim for most data and cloud computing costs spent on R&D. However, you cannot claim for data and cloud computing costs which are attributable to qualifying indirect activities.
Externally provided worker costs
Workers supplied by a staff provider such as an employment agency, are classed as externally provided workers.
You can:
- claim up to 100% of the relevant payments, if your company and the staff provider are connected
- claim 65% of the relevant payments made to a staff provider, which is not connected to your company, if they supply externally provided workers for the project
EPW costs in special circumstances are subject to a restriction preventing them from qualifying where the activity takes place abroad, with some exceptions.
HMRC published draft guidance on overseas expenditure and sought views on this. A final version of this guidance is currently being prepared and will be published shortly.
Staffing costs
For staff working directly on the R&D project, you can claim for these costs, to the extent that they are attributable to the qualifying R&D:
- bonuses
- salaries
- wages
- pension fund contributions
- secondary Class 1 National Insurance contributions paid by the company
In specific circumstances you may also claim for an element of administrative or support staff who work to directly support a project, for example:
- human resources used to recruit a specific person to work on the project
- specialist cleaning staff
These are known as qualifying indirect activities.
These are some examples of staff costs that you cannot claim for:
- redundancy payments
- staff costs for clerical or maintenance work that would have been done anyway, like managing payroll
Software
You can claim for software licence fees for R&D and a reasonable proportion of the costs for software partly used in your R&D activities.
Examples of costs that do not qualify
These are other examples of costs that you cannot claim for:
- the production and distribution of goods and services
- capital expenditure
- the cost of land
- the costs of obtaining patents and trademarks
- rent, rates or leasing costs
How to calculate relief
Please note that some expenditure is subject to a payment condition — read HMRC guidance at CIRD82100.
-
Work out the expenditure which is directly attributable to R&D, which includes both direct R&D and qualifying indirect activities.
-
Exclude any data and cloud computing costs attributable to qualifying indirect activities.
-
Exclude any contract or EPW payments attributable to R&D taking place abroad, unless an exemption applies.
-
Reduce any relevant unconnected subcontractor or external staff provider payments to 65% of the original cost — restrict any payments to connected contractors or staff providers, if the law requires it.
-
Add all costs together.
This is your qualifying expenditure.
Research and Development expenditure credit
Multiply your qualifying expenditure by the credit rate (20%) to get the expenditure credit amount.
Enhanced support for loss-making R&D intensive SMEs
-
Multiply your qualifying expenditure by 86% to give the additional deduction amount.
-
Multiply your total qualifying expenditure by 186% to give the enhanced expenditure amount.
You can surrender either the enhanced expenditure amount or your total unrelieved loss after taking the additional R&D relief deduction for the period, whichever is lower, for a payable tax credit at a rate of 14.5%. However, unless you are exempt from the cap, the tax credit you claim cannot exceed the PAYE cap.
PAYE cap
The amount of the PAYE cap for claims under both the merged scheme and ERIS is £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities.
Under the merged scheme, the PAYE cap (where applying) limits the amount of payable credit you can receive in the accounting period for which you claim. Any excess over the cap is carried forward and treated as an amount of RDEC to which the company is entitled for the next accounting period.
Under ERIS, any claim for tax credit in excess of the cap (where applying) is invalid.
The PAYE cap does not apply if the company is exempt. Further information is available at CIRD90600.
Before you claim
You must follow these steps before you claim the expenditure credit, or your claim may not be valid.
For accounting periods beginning on or after 1 April 2023, check if you need to submit a claim notification form to notify HMRC in advance of your claim. Find out what you need to provide when you tell HMRC that you’re planning to claim R&D tax relief.
From 8 August 2023 you must submit an additional information form to support your claims. Find out how to send the information and what to provide when you submit detailed information before you claim R&D tax relief.
How to claim
Claim using the Company Tax Return and:
- for RDEC, show the expenditure credit as taxable income in your profit and loss account, or by adding it to your profit in the single iXBRL computations file
- for ERIS, include the additional deduction in calculating your adjusted trading loss in your tax computations, and ensure that the losses which you have surrendered in order to receive a payable tax credit are excluded from your loss carry forward figure
- put an ‘X’ in box 656 to tell us that you’ve submitted the claim notification form
- put an ‘X’ in box 657 to tell us that you’ve submitted the additional information form
- include your bank details so that HMRC can make the payment
Complete the supplementary form CT600L.
Guidance is available to help you complete your Company Tax Return.
If your tax relief claim covers more than 12 months, submit a separate claim and additional information form for each accounting period.
You can make a claim any time up to the last day of the period either:
- two years beginning with the last day of the period of account, in a case where the period of account to which the claim relates is not longer than 18 months
- 42 months beginning with the first day of the period of account, in any other case
Check the ‘Before you claim’ section to make sure that your tax relief claim will be valid.
How to use the merged scheme RDEC
You must follow these steps to use the expenditure credit before the final amount is paid to your company.
Step 1
Use the credit to pay your Corporation Tax liability for the accounting period. If the credit means you’re due a repayment for Corporation Tax that has already been paid, the interest will be calculated from the day that the RDEC is used to pay the liability.
If there is any expenditure credit left after paying some or all of your Corporation Tax liability go to step 2.
If there is no expenditure credit left, you do not need to follow step 2 to step 7.
Step 2
Compare the amount of expenditure credit brought forward from step 1 with the net amount of expenditure credit you’ve claimed. The lower of the 2 figures is carried down to step 3.
If the expenditure credit brought forward exceeds the net amount, the excess may be either surrendered to another group company to meet a Corporation Tax liability which it owes to HMRC, or carried forward to pay the company’s Corporation Tax liability in future periods.
The net amount of expenditure credit is the figure you’ve claimed minus notional tax on this amount at the applicable rate. This is the main rate of Corporation Tax (25%) for companies with total profits chargeable to Corporation Tax of more than £50,000, excluding the RDEC. Otherwise, it is the small profits rate (19%).
Step 3
Any amount exceeding the PAYE cap is carried forward to future periods unless the company is exempt from the cap.
Step 4
You must use the remaining amount to pay any outstanding Corporation Tax liabilities for any accounting periods.
Step 5
You can surrender the credit which still remains at this step wholly or partly to any group member. The amount surrendered can only be used to pay a Corporation Tax liability of that group member.
Step 6
You must use the expenditure credit to pay any other company tax liabilities, like VAT, PAYE or liabilities under a contract settlement.
Step 7
Any RDEC left at this stage can, as long as the ‘going concern’ conditions are met, be paid to your company. Further information is available at CIRD89820.