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R&D Changes from April 2024

A little less compensation, a little more admin, R&D relief

We have seen an increased focus in the past couple of years from HMRC on reforming R&D, both in the way reliefs are provided and how claims are submitted. For accounting periods 1 April 2024 SME relief will no longer be available to all but the most intensive R&D-focused companies, with the majority of companies only eligible for relief through the newly merged RDEC scheme. At the same time, the rules have changed around subcontracting and foreign expenditure to ensure that companies are rewarded for UK-based R&D. Before these changes came into force, there have already been increases in the administrative requirements for filing and notifying HMRC about claims that are in operation that are worth looking at. 

As you may already be aware HMRC now require all R&D claims submitted on or after 1 August 2023 to have completed an additional information form on HMRC’s website before the claim is submitted. The forms do not request any information that should not already be included in an R&D claim. The forms detail financial information on the R&D spend, technical information on the projects undertaken and administrative information about the company.

In addition to these new filing requirements there are also new requirements for notifying HMRC that you are going to submit a claim if; you are claiming for the first time or your last claim was made more than 3 years before the last date of the claim notification period. This applies for R&D claims with accounting periods beginning on or after 1 April 2023 (so a company with a March year end would have their first notification period in their year ended 31 March 2025) .  The notification must be submitted between the first day of the relevant accounting period up to six months from the end of the period of account. The way this will work is that a company that has a 31 December 2024 year end will have from 1 January 2024 to 30 June 2025 to submit their notification to HMRC.

From 1 April 2023 we saw a change in the R&D reliefs with the additional expenditure deduction for SME’s reducing from 130% to 86%, along with the SME tax credit on losses reducing from 14.5% to 10%. Whilst for Research and Development Expenditure Credit (RDEC) the rate increased from 13% to 20%. From the 1 April 2024 there is no longer the distinction between the SME relief and RDEC claims, the distinction is now between loss making SMEs that meet the definition of R&D intensive companies and other companies.

The new merged scheme uses the RDEC scheme as a template. This means that the R&D relief is provided in the form of an above the line expenditure credit. This credit can be offset against a corporation tax liability or it can be paid (and taxed) to the company. The merged scheme is more generous than the RDEC scheme, with the credit capped like the old SME relief at three times a businesses’ combined PAYE and NIC liabilities plus £20,000 and subcontracted costs (provided conditions are met) can be included.

To meet the criteria of a loss making R&D intensive SME a company must:

  • Be loss making
  • Meet the SME criteria 
    • Less than 250 employees
    • Less than €50m turnover
    • Balance sheet total of less than €43m
  • R&D qualifying expenditure represents 30% (40% pre 1 April 2024) of the company’s total expenditure

A loss making R&D intensive SME is able to claim the enhanced deduction of 86% and surrender their loss for a payable tax credit at 14.5%. 

All companies that do not meet the loss-making R&D intensive SME criteria will utilise the merged RDEC scheme. Under this scheme companies will receive an above the line tax credit at 20% of the qualifying R&D expenditure. 

This is illustrated below.

Description Loss Making R&D intensive SME Merged Scheme and profit making
Qualifying R&D expenditure
£100,000
£100,000
Enhanced deduction at 86%
£86,000
Total deduction of 186%
£186,000
Tax credit at 14.5% of £186,000 / RDEC at 20% of £100,000
£26,970
£20,000
Tax charge at 25%
£5,000
Net RDEC credit
15,000
Effective tax saving on £100,000 initial expenditure
26.97%
15.00%

Along with the changes to the rate that the reliefs are available, there are further changes to R&D claims.

  • All forms of R&D credits will now be covered by the PAYE/NIC cap, mentioned earlier. This calculation is like the previous calculation used in the SME tax credits and is thus a little more generous than pre-April 2024 RDEC.
  • The rules on subcontracting R&D under the new merged RDEC scheme have been clarified and are closer to how subcontracting worked under the previous SME scheme. Where a company contracts out R&D activities to a third-party contractor, the costs of the contracting are relievable under R&D rules for the customer not the contractor. This does not apply if the customer is an ineligible company or is not subject to UK corporation tax.  A contractor can make R&D claims if it chooses to undertake its own R&D connected to work it has been subcontracted to do where that subcontracted work is not, or does not include R&D. There is also an election that can be made to declare a group company ineligible in respect of R&D, in the scenario the work is subcontracted to a group company, so that the customer can make the R&D claim. 
  • The new rules require contracted out R&D to be undertaken in the UK and with the contractors subject to PAYE and NIC unless the conditions exist such that it is necessary to perform the R&D abroad. There is no way for HMRC to come up with a definitive list of the necessary conditions, so there is guidance two main categories:
    • Geographical, environmental and social conditions e.g. needing an environment not native to the UK (high altitude, deep ocean), presence of machinery or facilities
    • Legal or regulatory requirements e.g. guidance from regulators or explicit legislative requirements
  • The focus on ensuring there is a UK focus to the R&D expenditure relief for contracted out work is limited. Expenditure must be incurred either on R&D in the UK or on R&D undertaken outside the UK only because the necessary conditions are not present in the UK

  • The restriction on the relief available when a company receives a subsidy or grant funding will not be a part of the R&D rules from 1 April 2024

With the increased administrative burden required to file R&D claims it is vital to get your tax advisor in as early as possible to ensure that all the necessary paperwork can be done to make your claim submission as simple as possible. Additionally as the new merged scheme is less generous it is also useful important that your advisor is able to analyse the R&D expenditure fully to ensure that your claim is maximised.

If you have any questions, please do not hesitate to get in touch.