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How is the Merged R&D Scheme different than the SME and RDEC schemes?

25th Mar 2024
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With the introduction of the Merged R&D scheme, HMRC has fused many aspects of the old SME and RDEC schemes. Other aspects of the Merged Scheme are entirely new.

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Canva - Leung Cho Pan

Coming into effect for accounting periods starting on 1 April 2024, the new scheme is meant to be simpler, more resistant to fraud, and easier for HMRC to administrate. 

Although the legislation for the Merged scheme is available online and HMRC has published a lot of new guidance, many advisors are finding it hard to keep up with all the changes. What’s worse, the guidance on subcontracting and overseas expenditure is still to be finalised, leaving advisors unsure about these two very important aspects of the new scheme.

If you’re struggling to get to grips with what’s changed, here are some of the most important points:

  • Large companies and SMEs can now both claim under the Merged Scheme.
  • Where theres a contract relating to R&D, the claim generally lies with the company that decided to do R&D. That could be the customer OR the contractor, depending on the circumstances.
  • Companies get back 20% of what they have spent on qualifying costs, but this is taxable.
  • The scheme contains a cap, linked to a company’s PAYE and NIC liabilities – although not all companies will be affected.
  • In most cases, overseas expenditure on subcontractors and Externally Provided Workers will not qualify for relief.

We’re barely scratching the surface here, and it’s important to study HMRC’s new guidance if you want to be compliant with all the new rules and detail. As usual, the guidance is pretty dense and confusing - it's difficult to get to grips with on your own.

If you're looking for a helpful explanation of the Merged R&D Scheme, you can take our free training – An Advisor’s Essential Guide to the Merged R&D Scheme. It consists of a series of short videos and assessments to check your knowledge as you progress.

Start your free R&D training course

Are any of the Merged R&D Scheme rules the same as before?

While the Merged Scheme brings about many changes, many things about it are the same or very similar to the old SME and RDEC schemes. 

  • Companies still have to be liable for corporation tax
  • The rules for qualifying costs are largely the same, except for the restrictions to overseas expenditure.
  • The definition of R&D for tax purposes hasn’t changed
  • Companies still have to notify HMRC before claiming, unless they’re exempt
  • You still need to submit an Additional Information Form (AIF) before you submit the CT600.

We also don’t expect to see HMRC’s approach to compliance changing overnight. The most common causes for compliance checks are still things like the company’s SIC code, and advisors not including the right information in the AIF or technical report. These haven’t gone away.

Remember that the Merged Scheme applies to accounting periods which start on or after 1 April 2024. This means that until early 2027, you’ll also need to be fluent in the rules of the SME and RDEC schemes. 

Also, if you think the company qualifies for enhanced relief as an R&D-intensive loss-making SME, be aware that different rules apply for expenditure from 1 April 2023 and accounting periods starting on or after 1 April 2024.

Read our previous article in this series to learn more: Advisors need to grapple with 4 different R&D schemes come 1 April 2024.