New research and development schemes and their effect on corporation tax payments

Late payment interest has been rising in line with Bank of England interest rates recently and there are some major changes to the R&D scheme.

One of the key things that companies need to be aware of is that they may have to consider the R&D relief when calculating their corporation tax liability for the first time. By moving from the old SME scheme to the new merged scheme, it may mean paying the corporation tax earlier or incurring more interest on late paid corporation tax instalment payments. This will have major cashflow implications for small and medium companies and groups that make R&D claims.

Interest rate changes

HMRC are starting to penalise late payers of tax more than previously whilst not rewarding those that pay their tax early. From April this year, HMRC have been charging 4% above Bank of England base rate (“base rate”) on late paid Corporation tax as opposed to 2.5% previously.

For companies that don’t currently pay their corporation tax by instalments, this currently stands at 8% per annum (as at Wednesday 27 of August).

If a company is large or part of a large group, they will pay their corporation tax by instalments (except in the first year of being large). In April, HMRC also raised the interest rate on late or under paid quarterly instalment payments QIPS from 1% above base rate to 2.5% above base rate and is now at 6.5% per annum.

If companies overpay their quarterly instalments, then you get interest at base rate less .25% which means 3.75% interest is currently received.

Corporation tax payments for SMEs with R&D claims

For companies that are considered small or medium, the vast majority of them would have made R&D claims under the old R&D SME scheme which acted as an additional corporation tax super-deduction. The effect would be to reduce the taxable profits of the company and therefore the corporation tax due. If they were paying this tax via either QIPs or via accelerated QIPs, the effect would be to reduce these QIPs for the whole year.

QIPs under new merged scheme

From accounting periods beginning on or after 1 April 2024, usually this will be for companies with accounting year ends ending on or after 31 March 2025, the R&D schemes have changed. There is a merged scheme which applies to the majority of companies and a scheme for SME intensive companies called the enhanced R&D intensive support (ERIS) scheme.

We are only going to discuss the effects of the merged scheme on QIPs as the ERIS companies will be loss making and therefore usually don’t need to make corporation tax payments.

Under the merged scheme there will be a number of changes to how the R&D claim is made. The mechanism is quite different to the old SME R&D scheme. The R&D deduction to profits mentioned earlier is removed and replaced by a 20% R&D taxable credit that goes into the accounts above the tax line. This means that the accounts now show a healthier profit (or reduced loss) and there are more taxable profits.

The tax relief is given by a credit of 20% R&D expenditure as if they had made a payment, after the R&D claim has been made. The net effect of the R&D merged scheme relief is 15% (or up to 16.2% for loss making companies).

One of the downsides of the merged scheme’s credit mechanism is instead of reducing taxable profits it actually increases these taxable profits. This will also mean that companies paying their tax by quarterly instalments will have more tax to pay until they actually make the R&D claim. For companies close to the QIPs threshold, the R&D also has to be taken into account, and this will push some companies into having to make their corporation tax payments by QIPs.

As the R&D credit is made when the corporation tax return is filed, it can mean until the claim is made, there will be more corporation tax to pay earlier which also now incur higher rates of late paid interest. The net effect for companies that were making R&D claims under the old SME scheme and paying QIPS is that there will be more interest on late paid QIPs and there is a dilemma. If the companies pay the correct QIPs there will be more tax paid earlier and then once the R&D claim is made, they will get some of this tax refunded or they can pay the QIPs based on their estimated final Corporation tax and incur interest at either 6.5% and then 8% depending on which QIP is outstanding.

Example

If you imagine a company with profits of £740,000 which has qualifying R&D expenditure of £500,000 for the year ended 31 March 2025 and one other associated company. The limit for paying by corporation tax by instalments is £1,500,000 but this figure is divided by the total number of associated companies and therefore if the company made taxable profit of £750,000 or more it would pay by QIPs.  

If the company does not make an R&D claim it would pay its corporation tax after 9 months and 1 day e.g. 1 January 2026 as its taxable profits of £740,000 is lower than £750,000.

If the company was still under the old SME R&D scheme, its taxable profits would be reduced by the enhanced R&D expenditure claim of £430,000 (86% of the £500,000 R&D expenditure). The companies’ taxable profits would then be £310,00 which is well below £750,000.

However, under the new merged scheme, the company would initially add 20% of the R&D expenditure to the taxable profits, so £100,000 would be added being 20% of £500,000. This means that its taxable profits have risen to £840,000 and therefore the company’s corporation tax would be due by QIPs. The QIPs would be a quarter of the £210,000 until the R&D claims is made.

The final corporation tax payable would drop after R&D claim is made to £110,000 but it would have pay QIPs.

The R&D claim is still extremely valuable and is worth £75,000 in this example but there is some cashflow and interest implications.

If you would like to review your position and understand how the new R&D schemes impact your corporation tax payments, please do not hesitate to get in touch.