R&D Tax Relief – What companies need to know about the Merged Scheme

The merging of the SME and RDEC schemes means companies need to not only understand the incoming changes but also plan ahead.

HMRC has provided details of the merged scheme, which includes how the relief will be directed to companies making the decision to undertake the R&D. The notes states:

Where a company with a valid R&D project contracts a third party to undertake some of the (qualifying) work connected with their R&D project, the company may claim the relevant (qualifying) costs of that contract. The company contracted to do that work may not claim for R&D activities which delivers the project outcome for another company’s project.

If a company is contracted to do work for another company, but the work does not form part of R&D for the customer and was instead initiated by the contractor, then the contractor may be able to claim relief for their work, if they meet the requirements of having valid R&D which is otherwise eligible for tax relief. This is considered an essential element.

Moving the claim to the company making the decision to do the R&D will result in more R&D getting relief. Under the current RDEC scheme, there are companies conducting subcontracted work as part of another company’s R&D project whose work is ‘routine’ (not R&D) in isolation so that neither company can receive R&D relief. Allowing the decision maker to claim for R&D contracted out should resolve this issue. For example, where a company contracts out qualifying activities to a contract research organisation, such as a clinical trial, the company will be able to claim for the costs of that contract.

As set out in the draft legislation in July, contracted R&D carried out by subcontractors who are working for non-UK corporation taxpayers, such as overseas companies, will continue to qualify for relief. 

However, if a company is contracted to provide a product or service which is not R&D, such as constructing a building or a software product, if they undertake R&D in delivering that product or service, they would be able to claim relief even though they are undertaking R&D on an activity contracted to them. The exact details of who should claim the relief will depend on the specific contract.

The full technical note is available here.  

There have been a few late amendments to the Finance Bill, including one to deal with the confusion of who can claim R&D relief during the transition to the new regime (where accounting year ends differ). 

As with any legislative change, there will always be winners and losers.  It is therefore important companies review their contracts on a case-by-case basis to understand how they may be affected by the changes.  

With the upcoming changes to the R&D Tax Relief Scheme, it’s crucial for your business to understand and adapt to these developments.  Don’t navigate these complexities alone.  Our dedicated R&D team is here to guide you through every step.  Contact our tax team today at js.tax@jsllp.co.uk to discuss your specific situation.