Login
From 1 April 2024, there are further significant changes to the R&D tax relief regime. Following on shortly from the changes announced in recent years, these changes dramatically reduce the amount of R&D tax relief available to many owner managed businesses. Joy Shaw, Senior Tax Adviser, explains what these changes are and how we can help with your R&D claims.
Key Changes
For accounting periods starting on or after 1 April 2024, the two current R&D schemes are being merged into one scheme, based on the previous large company RDEC (Research & Development Expenditure Credit) scheme.
The aim of this merger is to make claiming R&D tax relief simple, easy for businesses to understand with one set of rules. However, the main problem with this, is that one set of rules is based on the large company RDEC scheme, which 87% of companies have never used before!
And as well as this one simple set of rules, there will be another set of rules for companies which meet the definition of R&D intensive.
The SME scheme previously available to the vast majority of claimants was relatively simple. It worked by providing an uplift on R&D qualifying expenses. If for example, a company spent £100,000 on R&D qualifying costs, they received an additional deduction of £86,000, reducing their Corporation Tax liability. The Corporation Tax saving equates to £86,000 at the Corporation Tax rate of 25%, meaning an effective tax saving of 21.5% on the £100,000 of qualifying expenditure.
| Year Ended 31 March 2023 | £ |
| Profit | 500,000 |
| R&D expenditure | (100,000) |
| R&D uplift | (86,000) |
| Taxable profit | 314,000 |
| | |
| Corporation Tax | 78,500 |
| | |
| R&D Extra Tax Saving | 21,500 |
If the R&D claim created or enhanced a loss, this could be surrendered for a repayable tax credit.
The RDEC scheme however takes a little bit of more effort to get your head around. Instead of an enhanced expense, companies have an ‘above the line’ taxable credit. This amounts to 20% of the qualifying expenditure. So, taking forward the example above, this is the £20,000 income amount shown in the table. The Corporation Tax liability is then calculated on this profit before the RDEC credit is then deducted. For a company paying at the full 25% rate, the effective tax saving is 15%. This is a significant reduction from the 21.5% that the company could claim in the previous year.
| Year Ended 31 March 2024 | £ |
| Profit | 500,000 |
| R&D expenditure | (100,000) |
| RDEC credit | 20,000 |
| Taxable profit | 420,000 |
| | |
| Corporation Tax | 105,000 |
| Deduct RDEC | (20,000) |
| Net Corporation Tax payable | 85,000 |
| | |
| R&D Extra Tax Saving | 15,000 |
Given the significance of the changes announced and their potential impact on small early-stage companies, a concession has been announced for ‘R&D Intensive Companies’.
Broadly these are companies who spend at least 30% of their total expenditure on R&D qualifying costs. These companies will still be able to benefit from the SME scheme rates of R&D relief and be able to surrender tax relief for a repayable tax credit.
One further change is the limiting of tax relief to activities and costs incurred on R&D work which is undertaken within the UK. Previously as long as the claimant company was subject to UK Corporation Tax, R&D tax relief could be claimed on qualifying expenditure regardless of where it was carried out. However, for accounting periods starting on or after 1 April 2024, relief is now restricted to R&D undertaken within the UK. This has the potential to impact on a large number of UK businesses so careful planning should be considered for those businesses which are affected.
Administration Changes
From August 2023, all claims for R&D tax relief have required to be filed alongside an Additional Information Form. This form provides HMRC with information regarding the costs being claimed as well as the R&D activities being undertaken.
Additionally, companies which have not made a claim for R&D tax relief in the previous 3 years must submit an advanced notification form to HMRC. This notification must be submitted within 6 months of the end of the company’s accounting period.
Why have HMRC made these changes?
The R&D tax relief schemes have previously been very generous. Given that this scheme enables some companies to claim a cash refund from HMRC, it has been targeted for fraudulent purposes. In the past only a very small number of R&D claims were checked by HMRC enabling this fraud to expand. However, over the past 2 years, HMRC have put additional resources into thew checking of R&D claims. Some estimates say that as many as one in five R&D claims are now being reviewed.
Therefore, by simplifying the scheme and requiring additional technical information, it enables HMRC to focus their efforts on the claims that require their attention whilst at the same time making fraudulent claims less attractive.
How to make a Qualifying Claim for R & D
In order to make a compliant qualifying claim for R&D, directors need to acquaint themselves with the R & D criteria relating to their company, or to work with a trustworthy agent who will be able to guide them through the process, and importantly be there for support should HMRC select the claim for detailed scrutiny.
At Scrutton Bland, we have a dedicated team who will be pleased to work with you to identify projects eligible for R&D, and to guide you through the process of making a claim. To get in touch, please call Joy on 0330 058 6559 or emailing hello@scruttonbland.co.uk
Back