A brave new R&D world: Insights from the experts
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Over the past two years, the R&D tax relief schemes, along with HMRC’s approach to compliance, have changed almost beyond recognition. As the final set of changes comes into force, here’s our summary of what the R&D tax relief world looks like now, and what advisors need to be aware of as we work through this transition period.
Rate changes
The first major change to take effect was the changes in rates of relief, where the SME enhancement rates were reduced to 86% from 130%, and the SME tax credit rate to 10% from 14.5%. Simultaneously, the RDEC rate was increased to 20% from 13%. This applies to any qualifying expenditure incurred on or after 1st April 2023, and has the effect of aligning the amount of benefit available to SMEs and Large Companies receive, paving the way for the Merged scheme (more on this later).
R&D intensive SME scheme
For expenditure incurred on or after 1st April 2023, the R&D intensive SME scheme was brought in to compensate loss-making R&D intensive companies for the drop in rates of relief. This applies to companies whose qualifying R&D spend is 40% or more of their total trading and operating expenses for the claim period, and allows them to claim tax credits at the previous 14.5% rate rather than the reduced rate. There are some complications around this relating to connected companies – claimants with connected companies must take the R&D and trading and operating expenses of all connected companies into account when calculating whether the 40% threshold has been reached.
For claim periods starting on or after 1st April 2024 the expenditure limit will be reduced to 30%, but all other conditions remain.
Additional information Form
The next change to hit R&D tax relief claimants was the introduction of the Additional Information Form (AIF). This came into force on 8th August 2023, and is required for all claims, regardless of start or end dates. The AIF is an online form that must be submitted to HMRC ahead of the CT600 and requires details of both the technical aspects of the claim and a detailed breakdown of the costs. The number of projects that must be described in detail is mandated and depends on the amount of cost represented by each project.
New eligible costs
For accounting periods starting on or after 1st April 2023, there are several changes to think about. The first is the most positive – some new eligible costs that can be included! For these claims, pure mathematics research projects can be included alongside cloud computing and data licence costs. These are small changes, but bring the schemes more up to date with how companies operate.
Pre notification
Alongside the new costs, HMRC brought in a requirement to notify them of a company’s intention to claim R&D tax relief within six months of the end of the claim period. This only applies to claims starting on or after 1st April 2023, and only to companies that have not made a claim for R&D tax relief within three years of the end of the notification period i.e. six months after the end of the claim period.
R&D claim pre-notification is made through an online form, and should be a fairly simple process – we’re only just starting to see this being used, so time will tell how it will function and how HMRC will use the information gathered through this process.
Merged scheme & ERIS
Last, and by no means least, we have the new Merged R&D scheme, or R&D Expenditure Credit. This applies to accounting periods starting on or after 1st April 2024, and replaces the SME and RDEC schemes.
The new merged scheme will apply equally to SMEs and Large Companies, and gives a taxable credit of 20%, as per the current RDEC scheme. The rules will largely follow the current SME scheme, with a few notable exceptions:
- Grants and subsidies will no longer affect a claim.
- Costs for subcontracted work that takes places overseas will not be allowable.
- Payments to EPWs will only be allowable where they are subject to UK PAYE.
- Contracted out R&D costs can be claimed by the customer where they can show that they intended or contemplated that R&D would be required.
- Contractors can claim for R&D done to fulfil a contract if they initiate it at their own volition.
The ERIS scheme will run alongside the merged scheme for loss-making SMEs that meet the criteria (R&D spend must represent at least 30% of total trading and operating expenses). The rules of ERIS are substantially the same as for the merged scheme, but the benefit is realised in a similar way to the old R&D intensive SME scheme, giving a tax credit of 14.5% of surrenderable losses. Advisors should note that, for some SMEs, it will be more beneficial to claim under the merged scheme than the ERIS scheme.
Finally, advisors should also be aware that specific rules are to be brought in for companies registered in Northern Ireland that meet the criteria for ERIS. These companies may be able to include some overseas subcontractors costs, on a capped basis.
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We recently delivered a webinar in partnership with The R&D Community on 12th March 2024, where we delved further into the details of the above changes and showed a brief demonstration of our technology and The R&D Community’s training portal.
You can watch an on demand version on our YouTube channel here:
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We’d love to hear what you think – feel free to drop us a line – it’s always good to catch up on how the market is developing:
