However, the UK Government wants to reward the most R&D intensive businesses and incentivise those on the cusp of being R&D intensive to reach that threshold. Therefore, there is a second ‘scheme’ or ‘rate’ for loss-making R&D intensive businesses, called the Enhanced R&D Intensive Support (ERIS) scheme, that follows the previous SME calculation at a 14.5% rate. The threshold to meet the R&D intensity condition is at least 30% of a company’s total expenditure to be related to R&D.
The merged scheme continues with largely the same assessment criteria, to have a qualifying R&D project the project must satisfy three conditions:
The previous SME scheme penalised businesses that received a form of subsidisation to offset the costs of their R&D project(s), perhaps in the form of grants or other funding. This limitation will be removed from the merged scheme, businesses with subsidised R&D projects will be able the full amount entitled to them should they meet the existing rules of the scheme.
The UK’s R&D reliefs will be focused to limit benefit to R&D done in the UK. This will be in force as part of the merged RDEC scheme. Therefore, as a rule of thumb, overseas R&D costs will not be qualifying R&D expenditure under the merged scheme. However, there are exclusions to this rule, detailed here Overseas restrictions under the new merged RDEC scheme.
The entity contracting out the R&D (customer) would be the entity eligible to claim R&D relief, not the subcontractor. The reasoning behind this principle is that it allows the company making the decision to do the R&D and bearing the financial risk to claim R&D relief.
For more detailed guidance, see New rules regarding contracted out R&D when claiming R&D tax relief.
