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How have qualifying costs changed in the Merged R&D Scheme?

12th Apr 2024
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The Merged R&D Scheme combined many aspects of the old SME and RDEC Schemes, but there are fundamental changes to qualifying costs that claimants and advisors will need to be aware of.

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A crucial element of preparing an R&D claim is ensuring that the costs included in the claim are accurate. With the introduction of the Merged Scheme for accounting periods starting from 1 April 2024, R&D advisors will need to pay close attention to the new rules to ensure that the costs included in a claim reflect any changes that have been made. 

Luckily, many of the rules surrounding qualifying costs in the old SME and RDEC schemes are the same in the new scheme, but there are some important changes. One of the largest differences involves overseas expenditure and the restrictions placed on Externally Provided Workers (EPW) and Subcontracted Activities

Generally, EPW expenditure that can be included in a claim is the same as in the old SME and RDEC rules. The key consideration is whether the payment is made to a connected or unconnected staff provider. The Merged Scheme has now added the condition that the staff provider must operate PAYE and Class 1 NIC for that worker. If that condition is met, then you can safely include the expenditure in a claim made under the Merged Scheme. 

This means that staff providers can be based overseas as long as the PAYE and NIC requirement is met for the workers engaged in the R&D.

In contrast, subcontracted activities are little more complicated. First, the rules on who can claim tax relief on subcontracted R&D have changed significantly. Additionally, R&D activity undertaken by the contractor must physically take place in the UK. Sounds simple enough, but what if the contractor then further contracts the work out to a third company that doesn’t conduct the work in the UK? More importantly, what if you don’t know that they’ve done that? Rules that appear straightforward might quickly become difficult to apply in practice.

We’ve covered the changes to overseas expenditure in broad strokes, but there’s a lot more to sink your teeth into. Our free course An Advisor’s Essential Guide to the Merged Scheme bundles all the essential changes about the Merged Scheme into a series of short videos and quizzes.

Many qualifying costs for R&D claims have stayed the same

On the whole, most types of activity that can be included in a claim are unchanged. The different types of qualifying costs can be broken down into six general areas:

  • Staff costs – salary, R&D expenses, NI contributions and pensions. 

  • Software and data – Such as modelling/analysis software, office tools, cloud computing services and data licences.

  • Consumables – Things like water, electricity, gas, and materials for some prototypes.

  • Clinical trial subjects – Usually, only phase 1, 2, and 3 trial subjects can be included.

  • Externally provided workers – Staff provided by another company to work on the R&D projects. 

  • Subcontracted activities – Work contracted out to another company.

Each of these areas does have some complexity, as we explain in the course. For the most part, you’ll be familiar with those if you’ve already been preparing claims under the SME and RDEC schemes.

What else has changed in the Merged R&D Scheme?

It’s reassuring to remember that, while there are some important changes, the merged scheme has kept much of the framework intact of the SME and RDEC schemes. If you’re starting to fill in those gaps where the Merged Scheme has changed things, read our previous article in this series: Is subcontracting any simpler under the Merged R&D scheme?