Mental bandwidth – Managing the chaos in R&D tax relief claims

While many firms were still adjusting to the practical impact of previous legislative reform, HMRC introduced a new merged R&D tax relief scheme in April 2024.

With the new scheme sitting alongside the previous systems, companies must now navigate through five different R&D tax relief schemes and seven distinct claim paths.

With little direction from HMRC, other than the updated CIRD, firms have been left to manage the chaos in R&D tax relief claims, to ensure that their clients are submitting information that meets the criteria for the relevant accounting period.

This complexity can significantly strain a firm’s mental bandwidth and resources – limiting the capabilities of their team and their appetite to support claims, despite the potential benefits for both claimant and adviser.

Increased scrutiny and compliance challenges

From the scheme’s inception until around 2022, the UK’s R&D tax relief operated with minimal scrutiny from HM Revenue & Customs (HMRC).

If a claim was subject to an enquiry, HMRC generally approached it with optimism and inquisitiveness, aiming to guide claimants in the right direction.

However, the relaxed oversight led to a significant increase in claims; some of which, whether intentionally or unknowingly, pushed the boundaries of eligibility.

As a result, rising instances of error and fraud prompted HMRC to introduce a new era of ‘volume compliance.’

While the goal was to combat fraud and ensure claims are well-substantiated, the burden on legitimate claimants and their advisers has increased significantly.

The need for a structured, methodical approach to claim preparation has never been greater. Ensuring that claims are fully compliant against the guidance, well-documented, and defensible in the event of an enquiry is now a fundamental requirement, not just a best practice.

And as if this wasn’t enough to contend with, the introduction of the merged scheme has added another layer of complexity for clients and their accountants.

Managing claims in this new era

With the new merged scheme in force for claims starting on or after 1 April 2024, claims under the old systems remain in place for claim periods starting prior to April 2024.

This includes processing amendments to or enquiries into past claims made under the SME and RDEC schemes.

Here is a reminder of how these schemes operate at the moment:

SME Scheme

Up to 31 March 2023: SMEs could claim an additional 130 per cent enhancement on their qualifying R&D costs, translating to a net tax benefit of 24.7 per cent for profitable companies and between 19-33 per cent for loss-making companies, depending on the overall profit/loss position.

From 1 April 2023: The benefit for profitable companies was adjusted to an 86 per cent enhancement on R&D costs, resulting in a net benefit of 16-21 per cent for profitable companies, depending on the incorporation tax rate.

For loss-making companies, the tax credit rate was reduced to 10per cent, leading to an overall benefit of 9-19 per cent depending on overall profit/loss position.

The R&D intensive scheme was also introduced for expenditure after 1st April 2023, whereby companies spending more than 40 per cent of their overall expenditure on R&D could continue to claim at the previous 14.5 per cent tax credit rate, where applicable.

RDEC Scheme

Up to 31 March 2023: The Research and Development Expenditure Credit (RDEC) scheme offered a tax credit rate of 13 per cent, which, after considering the corporate tax rate, amounted to a post-tax benefit of 10.5 per cent. This scheme is for large companies that are ineligible for the SME scheme.

From 1 April 2023: The RDEC was enhanced to a tax credit rate of 20 per cent, with the post-tax rate varying between 15 per cent and 16.2 per cent, depending on the specific corporate tax circumstances of the company.

This adjustment was designed to simplify the claims process and make the scheme more attractive to larger businesses engaging in R&D.

Merged Scheme

For accounting periods starting on or after 1 April 2024: A new Merged Scheme was introduced, consolidating the benefits of the SME and RDEC schemes into a unified framework.

This scheme maintains the enhanced headline rate of 20 per cent, similar to the RDEC from 2023, with a post-tax benefit ranging between 15 per cent and 16.2 per cent.

Under the merged scheme the same rate applies to both SMEs and Large companies, and the benefit is the same for profitable and loss-making companies, with the only influencing factor being the corporation tax rate payable.

Enhanced R&D intensive scheme

R&D-intensive loss-making SMEs – where more than 30 per cent of their total expenditure is on qualifying R&D – can continue to claim through a mechanism similar to the SME scheme with an enhancement rate of 86% and a tax credit rate of 14.5 per cent.

Complexity in claims

Alongside the changes to the schemes, there have been additional complexities added to the claims process, such as:

Pre-notification – Pre-notification requires companies to inform HMRC of their intention to submit a claim for R&D tax relief before making the claim. The requirement to pre-notify HMRC applies to companies that have not previously made R&D tax relief claims or those that have not claimed within the last three tax years.

Additional Information Form (AIF) – The AIF is designed to provide HMRC with detailed information about the R&D activities claimed by a company. This form helps HMRC understand the nature of the R&D projects, the technological uncertainties addressed, and the innovative steps undertaken. This form is now required for all submitted claims.

Even with the additional complexity and administration that these changes bring to the R&D tax relief process, R&D tax relief remains a valuable benefit for claimants and a profitable revenue stream for their agents.

The Importance of timely submissions

Given the two-year deadline for R&D tax claims, many businesses leave it until the last minute, often leading to rushed submissions or missed opportunities.

December and March remain peak times for claims, as companies push to meet financial year-end deadlines. However, with increased HMRC scrutiny, waiting until the eleventh hour adds unnecessary risk.

Encouraging clients to plan ahead and submit claims well before deadlines can help avoid unnecessary stress and ensure sufficient time for thorough claim preparation. In the current climate, a proactive approach to compliance is essential.

Looking ahead

Despite the challenges, the future of R&D tax relief remains positive for those willing to adapt. Businesses investing in genuine innovation still have a valuable opportunity to claim tax relief, and advisers who can navigate the evolving landscape with confidence will be well-placed to support their clients effectively.

At WhisperClaims, we continue to provide our customers with the tools and support they need to prepare robust, compliant claims for their clients. By combining structured technology with expert guidance, we help firms stay ahead of changes and mitigate risk.

Our supportive WhatsApp community – made up of some of the UK’s leading R&D experts – and our dedicated advice line, which operates alongside the platform, help accountants and advisers with any scheme or eligibility related queries.

If you’re looking to refine your approach to R&D tax claims, we’d love to help. Get in touch to book a demo and see how our software and Advice Line can support you.

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