Merged R&D scheme – Impact on quarterly instalment payments

Introduction of the merged R&D scheme

The government introduced the merged R&D tax relief scheme for accounting periods beginning on or after 1 April 2024. While most commentary to date has focussed on the changes impacting the R&D landscape, one important aspect not to be overlooked is the wider impact on tax attributes. Additionally, quarterly instalment planning is also significantly affected.

Previously, under the SME regime, the impact of an R&D claim acted as a super-deduction within the tax computation – reducing taxable profits. To the extent that a loss arose, a company could surrender such losses for an R&D tax credit.

As a reminder, companies with taxable profits exceeding £1.5m must pay their corporation tax liability in quarterly instalments. This is instead of the usual nine months and one day after the end of the accounting period. Additionally, the number of associated companies reduces these thresholds, as illustrated in the example later.

For instance, if a company anticipated taxable profits of £2m, but also had qualifying R&D expenditure under the SME regime of £800k (resulting in a further deduction of £688k) then it would fall below the quarterly instalment payments (QIPS) threshold (assuming no other associated companies) and continue to pay its corporation tax liability nine months and one day after the period end.

Changes under the merged R&D regime

However, this is no longer the case under the merged R&D regime!

For accounting periods beginning on or after 1 April 2024, R&D relief under the merged regime is treated as a taxable credit rather than a super-deduction. This change has two important impacts:

Firstly, the taxable credit should be taken into account when determining whether the company’s taxable profits will fall into the QIPS regime. For example, if a company anticipates taxable profits of £2m with £800k of qualifying R&D expenditure under the merged regime, it would have a taxable profit of £2,160k and therefore need to consider the QIPS regime.

This is shown in the illustration below:

The second impact is that you cannot consider the reduction in tax liability from the credit for QIPs purposes. The credit from an R&D claim (the RDEC) is a stand-alone credit and is not treated as a deduction when calculating the corporation tax liability. Therefore, you should not include the reduction in liability from the RDEC in the calculation of quarterly instalment payments. For example, instalments should be based on the £540k rather than the £380k; otherwise, late interest will be calculated.

What about the year of grace?

A company will only need to pay its corporation tax liability in quarterly instalments when it is within the regime for a second consecutive period. This grace period allows companies time to plan and prepare. However, companies must be aware of when the instalment dates fall due, especially since interest on late or underpaid instalments will be charged at 7% from 6 April 2025.

Let’s look at the above example again – but this time base the workings on two associated companies, such that the thresholds for QIPS become £750k.

In the year ended 31 March 2025 – taxable profits of £1,312k result in the company being in excess of the QIPS threshold for the first time, and will need to consider QIPS for the 31 March 2026 period end.

The quarterly instalment dates become:

• 14 October 2025 – 25% of estimated liability
• 14 January 2026 – 50% of estimated liability
• 14 April 2026 – 75% of estimated liability
• 14 July 2026 – 100% of estimated liability

Note also that the company tax liability for the FY25 period will also be due on 1 October 2026, which can have a significant impact on cashflow.

What about companies in the very large instalment regime?

Companies in the very large regime have their instalment due dates accelerated by a further three months, becoming:

• 14 June 2025
• 14 September 2025
• 14 December 2025
• 14 March 2026

A company is considered to be in the very large regime if it’s taxable profits exceed £20m. This threshold is reduced by the number of associated companies. Whilst you would normally not expect to be caught out by having profits rise to this level in one year, it is not uncommon for companies to fall into the accelerated regime with relatively modest profit levels. This often happens because they are part of a group with multiple subsidiaries worldwide.

This can particularly be the case with PE backed businesses.

Crucially, there is no year of grace under the very large instalment regime. Once a company falls into it, the new instalment dates are to apply in that year.

Why is this important?

A company previously making R&D claims under the SME regime will need to consider how the impact of the merged R&D regime impacts their taxable profits, and whether they inadvertently fall into the QIPS regime.

As can be seen from the dates above, falling into the quarterly instalment regime can result in a  company being required to settle it’s tax liability significantly earlier than if it is used to settling its tax liability nine months after the year end, and potentially incurring interest charges if it is not on top of its instalment payment dates.

How can we help?

Companies are strongly recommended to proactively engage with their advisers to help forecast their future position bearing in mind the interaction of the R&D merged regime and quarterly instalment payments, in order to help mitigate interest charges from accruing. Please feel free to contact Andy Grey or your regular PKF Francis Clark contact if you would like to discuss this further.