R&D tax credit rate: merged scheme and older rates

What is the R&D tax credit rate?

For accounting periods beginning on or after 1 April 2024, the merged R&D expenditure credit (RDEC) rate is 20% for non ring-fenced trades and 49% for ring-fenced trades. ^[1]

Whether a project may qualify for R&D tax relief at that rate depends on whether it seeks an advance in a field of science or technology by resolving scientific or technological uncertainty.

The merged scheme 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 qualifying expenditure rules for the two new schemes are identical, but the credit amount is calculated differently; the guide to how the R&D calculation works sets out both.

The merged RDEC credit is liable to Corporation Tax as it is classed as trading income, so the headline rate is not the net benefit. ^[2]

Who the merged credit is for, and how it is taxed

The merged RDEC scheme is a taxable expenditure credit that can be claimed by companies that are trading, are chargeable to Corporation Tax and have a project that meets the definition of R&D. There are restrictions on claiming for some expenditure incurred overseas.

Profit-making and non-R&D intensive SMEs with qualifying R&D expenditure can claim relief under the merged RDEC scheme instead of ERIS. A company eligible for ERIS can still choose to claim under the merged RDEC scheme, but it cannot claim under both schemes for the same expenditure.

Older SME relief for accounting periods that began before 1 April 2024

R&D tax relief for small and medium-sized enterprises applies to SMEs with an accounting period that starts before 1 April 2024; where the accounting period begins on or after that date, a company can claim under the merged scheme or ERIS.

The older SME relief lets a company deduct an extra 86% of its qualifying costs from its trading profit for tax purposes, as well as the normal 100% deduction, to make a total deduction of 186%. ^[3]

A company that has claimed the relief and made a loss may claim a payable tax credit worth up to 10% of the surrenderable loss, or up to 14.5% if it meets the intensity condition for expenditure on or after 1 April 2023.

What can you claim R&D tax credits for?

R&D tax credits can be claimed for projects that seek an advance in a field of science or technology, and the improvements such a project makes may include:

• creating a process, material, device, product or service that increases overall knowledge or capability in a field of science or technology
• appreciably improving an existing process, material, device, product or service, for example to save costs or reduce waste, where the improvement is genuine and more than a minor or routine upgrade
• using science or technology to copy the effect of a current process, material, device, product or service in a new or improved way

The advance has to be in the overall field, not just for the business, although a process, product or service can still be an advance if another company has developed it but it is not publicly known or available. A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible, or how it can be done, even after referring to all the available evidence.

From 1 April 2023, mathematical advances can be treated as science for these purposes. An advance sought in the arts, humanities or social sciences, including economics, cannot be claimed for. ^[4]

Alongside the direct R&D, allowable costs can be claimed on qualifying indirect activities such as preparing the original R&D findings report, security that relates solely to the R&D project, and maintaining R&D equipment, including computers used for R&D purposes, where this is essential to carry out the R&D. ^[5]

How much does the UK government spend on R&D?

What the guidance does set out is the aim of the reliefs: to support and incentivise R&D, helping overcome a market failure, described as a positive externality, which causes underinvestment in R&D.

Instead of a spending total, the guidance sets out the support available on each claim: an expenditure credit under the merged scheme, and enhanced R&D intensive support for loss-making R&D intensive SMEs.

Paid costs and the project's start and end

Costs count from the start to the end of the project, and a cost has to have been paid before the claim is made to be eligible. ^[5]

Staff costs can be claimed for the time staff have spent working on the R&D project, including bonuses and secondary Class 1 National Insurance contributions paid by the company. If a member of staff spends 90% of their time on R&D activities and 10% on other activities in the company, 90% of their salary can be claimed.

If a company is an SME, it may be able to apply for advance assurance to confirm its claim will be accepted.

Notification and timing are set out in the guide to how far back R&D claims go.

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.