Enhanced

You intensivecannot supportclaim andif the mergedadvance scheme

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. different.

To claim either relief, you need to show how your project meets the tax definition of R&D for tax purposes.

Merged scheme — R&D expenditure credit

The merged scheme Research and Development expenditure credit is a taxable expenditure credit and can be claimed by eligible trading companies within the charge to UK Corporation Tax. You can choose to claim under the merged scheme instead even if you are eligible for ERIS,enhanced Research and Development intensive support, but you cannot claim under both schemes for the same expenditure.

How

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TheRDEC merged scheme isfor aexpenditure taxableincurred expenditureon creditor after 1 April 2023.

For loss-makers and cansmall beprofit-makers — claimedthat byis, for companies who: 

• arewith trading 
• aretotal profits chargeable to Corporation Tax 
• have aof projectless thatthan meets£50,000, excluding the definition of R&DRDEC 

This expenditureclaimed credit— isa liablelower torate Corporationof Taxnotional astax itrestriction is(currently classed19%) applies asat tradingpayment income.step 2.

Expenditure credit rates 

For expenditureall underother companies, the mergedrestriction scheme,will thecontinue rateto ofapply R&Dat expenditurethe creditCorporation isTax 20%.main rate (currently 25%).

Different rates apply to ring-fenced trades.trades.

Enhanced R&D intensive support (ERIS)support

Enhanced Research and Development intensive support allows loss-making R&D intensive SMEs to: 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 in the computations as a result of s1308 CTA 2009),2009 Conditions to be satisfied — allowable as a deduction in computing the profit if that option is taken), to make a total of 186% deduction deduction
• claim a payable tax credit, which is not liable to tax and which is worth up toto 14.5% 14.5% of the surrenderable loss loss

Companies registered in Northern Ireland should also refer to Research and Development (R&D) Taxtax Relief:relief: Enhanced R&D intensive support for loss-making SMEs based in Northern Ireland.

Who can claim 

YouTo candetermine only claim this relief if you are a loss-makingsmall SME.and Tomedium-sized determineenterprise, ifread yourthe businessguidance isat a SME, read CIRD91000 SME definition.

A A SME is is loss-making if it makes aa trading loss trading loss for tax purposes before the additional deduction is taken. Unless you have such aa trading loss, trading loss, you will not be entitled to that deduction or any payable tax credit. credit.

To claim under ERIS,enhanced youResearch alsoand Development intensive support, you have to meet the following intensity condition.

Intensity condition 

A company meets the intensity condition if: 

• it’s claiming for an accounting period beginning on or after 1 April 2024 
• its relevant R&D expenditure is at least 30% of its total expenditure (including that of any connected companies — read the Corporate Intangibles Research and Development Manual for information)

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 both of the following apply:

• you met the condition in your last 12-month accounting period
• you and made a valid claim to SME relief or ERIS in that period on expenditure incurred on or after 1 April 2023

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 enhanced Research and Development intensive support 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 made
• for any periodsworldwide ofconnected accountcompanies, the period of connectedtime personscovered (worldwide)by whichthe overlapaccounting withperiod of the claimant’sclaimant accountingcompany period —for readwhich the Corporateclaim Intangiblesis Researchmade and— Developmenta Manualcompany foris informationconnected if it was connected on any day during the accounting period

You’llFor further guidance on connection read CIRD82150 Categories of qualifying expenditure — connected persons.

You will need to identify the costsexpenditure that relaterelates 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. period.  

You mustshould use a reasonable method to allocateattribute costsexpenditure of the connected company to to the period of time covered by the accounting period of the claimant company for which the claim is made where either: either:

• there is a mismatch of accounting periods between the claimant and one or more connected company company
• a connected company is overseas (and so has no accounting period for UK tax purposes) purposes)

In certain circumstances it may be appropriate to splitapportion costsexpenditure on a time (day) basis. InBut in other cases it will be necessary to considerhave regard to when costsexpenditure werewas incurred to give a fair result, for example, where R&D expenditure is incurred unevenly through a period. Any basis you chooseadopt should be used consistentlyconsistently, and you should befairly ablereflect tothe explainunderlying effectivelyeconomic why you’ve used it. reality.

Relevant R&D expenditure meansis costsexpenditure 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 costs. expenditure. Note that only trading companies chargeable to UK corporation tax (or companies eligible to claim relief for pre-trading expenditure under s1045 CTA 2009 SME scheme — pre-trading expenditure) can have relevant R&D expenditure.

Total relevant expenditure includes: includes:

• costsexpenditure that areis 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 costsexpenditure that feedfeeds into the profit before tax in your profit and loss account or income statement statement
• if pre-trading, any pre-trading costsexpenditure on which relief would be available under s1045 CTA 2009 SME scheme — pre-trading expenditure
• any amounts deducted in the tax computation under s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit profit

It does not include: include:

• any amount of amortisation added back in the tax computation under s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit profit
• any costsexpenditure which consistconsists of a payment, or other transfer of value, to another connectedcompany with which the company is connected

If

Enhanced you’reResearch notand Development intensive support — rates

The rate of the additional deduction is 86%.

The tax credit rate is 14.5%.

Check what expenditure qualifies 

Before you make a loss-makingclaim for enhanced Research and Development intensive SMEsupport or for Research and Development expenditure credit 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 tax 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 

Profit-makingYou andcan non-claim either R&D intensiverelief SMEson withsome qualifyingof 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 Research and Development expenditure credit.

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 instead. 

Ifor yourenhanced creditResearch exceedsand theDevelopment PAYEintensive support.

Contracted out R&D cap

and subcontractor costs

The expenditureapproach creditto contracted out R&D for accounting periods beginning on or taxafter credit1 amountApril you2024 receiveis indifferent from the accountingapproaches periodused cannotin exceedboth the PAYEold Research and Development expenditure credit and SME cap,schemes. unlessIt you’reis exemptthe fromsame for both the cap.merged scheme and enhanced Research and Development intensive support.

The PAYEgeneral rule is that the party who takes the decision to undertake R&D capwill amountbe isable £20,000to plusclaim.

You 300%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 company’sactivity relevanttakes PAYEplace abroad, with some exceptions. 

HMRC has issued draft guidance on what is and is not contracted out R&D, and Nationalon Insuranceoverseas contributionsexpenditure, liabilitiesand sought views on this. A final version of this guidance is currently being prepared and will be published shortly.

Companies

You registeredcan inalso Northernclaim Irelandfor work which meets the tax definition of R&D and claimingwhich enhancedyou have done to fulfil a contract, but normally only if this work does not constitute R&D intensivecontracted support

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.

You can only claim for expenditure which you incur on paying overseas contractors to undertake work on your behalf in Northernlimited Irelandcircumstances.

Consumable items

You can claim for the relevant proportion of consumable items used up in the R&D, intensivethis support,includes:

• fuel
• materials
• power
• water

You you’recannot notclaim subjectthe 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 restrictionssubjects of clinical trials.

Contributions for reliefindependent on: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:

• paymentsdata 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 overseasqualifying contractorsindirect 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
• providersclaim 65% of overseasthe relevant payments made to a staff provider, which is not connected to your company, if they supply externally provided workers (EPWs)for the project

FindExternally moreprovided informationworker costs in CIRD150000special -circumstances are R&Dsubject Taxto Reliefs:a reformedrestriction reliefs:preventing overseasthem restrictions:from contents.qualifying where the activity takes place abroad, with some exceptions. 

IfHMRC therepublished isdraft anyguidance on overseas expenditure youand cannotsought claimviews ason partthis. A final version of enhancedthis guidance is currently being prepared and will be published shortly.

Staffing costs

For staff working directly on the R&D intensive,project, you maycan beclaim ablefor tothese claimcosts, RDECto forthe extent that expenditurethey underare attributable to the newqualifying mergedR&D:

• bonuses
• salaries
• wages
• pension scheme,fund providedcontributions
• secondary youClass meet1 National Insurance contributions paid by the rules.company

In Forspecific example,circumstances thisyou may bealso dueclaim for an element of administrative or support staff who work to thedirectly desupport minimisa limitsproject, for example:

• human resources used to recruit a specific person to work on the sectorproject
• specialist youcleaning staff

These are tradingknown in.as qualifying indirect activities.

FindThese moreare informationsome in:examples of staff costs that you cannot claim for:

• CIRD110000redundancy -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 Taxand Reliefs:a reformedreasonable reliefs:proportion newof RDECthe costs for software partly used in your R&D: contentsactivities.

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
• Additionalcapital informationexpenditure
• the youcost mustof submitland
• the costs of obtaining patents and trademarks
• rent, rates or leasing costs

How to calculate relief

All expenditure is subject to a payment condition. Expenditure which has not been paid before youthe claim is made, is not eligible for relief.

1. Work out the expenditure which is directly attributable to R&D, which includes both direct R&D and qualifying indirect activities.

2. Exclude any data and cloud computing costs attributable to qualifying indirect activities.

3. Exclude any contract or EPW payments attributable to R&D taking place abroad, unless an exemption applies.

4. 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.

5. Add all costs together.

This is your qualifying expenditure.

Research and Development taxexpenditure reliefcredit

Multiply your qualifying expenditure by the credit rate (20%) to get the expenditure credit amount.

Enhanced support for loss-making R&D intensive SMEs

1. Multiply your qualifying expenditure by 86% to give the additional deduction amount.

2. 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

IfThe you’reamount claimingof 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 exceedsof payable credit you can receive in the cap,accounting anyperiod for which you claim. Any excess over the cap is carried forward and treated as aan amount of Research and Development expenditure credit thatto youwhich canthe claimcompany inis entitled for the next accounting period. period.

What

Under youenhanced needResearch toand do next

Development intensive support, any claim for tax credit in excess of the cap (where applying) is invalid.

IfThe yourPAYE cap does not apply if the company andis projectexempt. areFurther eligibleinformation tois claimavailable R&Dat CIRD90600 SME scheme — payable tax reliefcredit for— smallrestriction andof medium-sizedthe enterprises,credit including PAYE cap.

Before you canclaim

You applymust forfollow advancethese assurancesteps tobefore confirmyou claim the expenditure credit, or your claim willmay not be accepted. valid.

YouFor mustaccounting 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 thisR&D tax relief.