How will R&D tax credit reforms affect my business?
Finance & Funding
Key learnings
- A new merged R&D tax credit scheme will come into force for accounting periods commencing on or after 1 April 2024.
- The new scheme will introduce a universal rate for all sizes of business, excluding those that are R&D intensive.
- Loss-making R&D intensive companies will benefit from a major cash boost, with an enhanced tax relief rate.
- The new scheme prioritises UK R&D activity and introduces restrictions on overseas expenditure, including subcontractors and externally provided workers.
There have been many changes to the R&D tax credit scheme in recent years, and more are being introduced for accounting periods beginning on or after April 2024. These changes include a merged scheme, intensive R&D rates, limitations on overseas expenditure, and enhanced compliance measures. Here, UMi partner Amplifi Solutions explains how they will impact businesses.
New R&D tax credit merged scheme (for accounting periods commencing on or after 1 April 2024)
Announced in the 2023 Autumn Statement, the new merged scheme aims to streamline the R&D credit system and its eligibility criteria. However, due to its swift implementation, there are some essential changes businesses need to be aware of and action in order to qualify and continue claiming.
Click each heading to find out more.
1
Contracted R&D
The change: In the new merged scheme, the company making the decision to undertake R&D can claim for contracted R&D. For example, if a software company contracted to deliver a solution decides to engage in R&D for that solution, they are eligible to claim.
Its impact: Currently, subcontractors are prohibited from making SME claims under the SME scheme rules. However, moving forward, businesses who initiate the R&D itself will now be eligible to make a claim.
This change to the incentive will be especially advantageous for SMEs depending on larger businesses for subcontracted work where the larger business did not intend contracting out R&D at the time of the contract.
2
Subsidised Expenditure
The change: Similar to the existing RDEC scheme, the merged scheme will not reduce support if a company receives grants covering a portion of its R&D expenses.
Its impact: This is a hugely positive change for earlier stage businesses - any grant monies received will no longer be deducted from the qualifying expenditure. This means that truly innovative businesses will be better funded than previously.
3
Loss-making Companies
The change: The notional tax rate for loss-making entities in the merged scheme will be lowered from 25% (as in the current RDEC scheme) to 19%.
Its impact: This will offer loss-making companies an immediate cash flow advantage with a 6% reduction in the notional tax rate.
4
Tax Relief Delivery
The change: Tax relief will be administered through a taxable above-the-line expenditure credit, which will be implemented at the current RDEC rate of 20%.
Its impact: This is a key change where a universal rate will be applied to all sizes of companies (excluding those that are R&D intensive – see below).
"Above the line" refers to the fact that it will be taxable and so will be an effective benefit of between 15% & 16.2% post-tax. However, this means a lower rate for non R&D intensive SMEs compared to previous years.
5
Payment Process
The change: Third parties cannot be nominated as payees for R&D tax credit payments, which means, in most cases, R&D reliefs will only be paid directly to the claimant company.
Its impact: This change primarily impacts R&D advisors rather than end-user companies. It means that any cash payments made to the claimant businesses must go directly to them, bypassing any initial advisor account.
Additional relief for loss-making R&D intensive companies
The change: Running alongside the new single merged scheme is the R&D intensive measure. It offers loss-making SMEs, who spend 40% of their outgoings on R&D, an enhanced tax relief rate of £27 for every £100 of qualifying R&D spend (from accounting periods on or after 1st April 2023).
Furthermore, from accounting periods commencing on or after 1st April 2024, the R&D expenditure threshold for loss-making SMEs will reduce to 30% or more of total expenditure.
It was also announced that provisions will be introduced to allow an intensive loss-making SME that successfully claims the intensive relief in one year to claim it in the following year, addressing concerns about exceptional spending that could impact the SME’s intensity ratio and create uncertainty.
Its impact: This will give a major cash boost to loss making SMEs
Overseas expenditure restrictions
The change: Restrictions on overseas expenditure, including subcontractors and externally provided workers (EPWs), came into effect from accounting periods beginning on or after 1st April 2024.
Other than the exception for companies registered in Northern Ireland claiming Enhanced R&D Intensive Support (ERIS), all of the following three circumstances must apply before expenditure on overseas contractors or EPWs can be considered as eligible for R&D tax relief:
- The conditions necessary for R&D are not present in the UK
- The conditions are present in the location where the R&D is undertaken
- It would be wholly unreasonable to replicate the conditions in the UK
Its impact: If a company is using overseas subcontractors, or EPWs that aren’t paid via a UK payroll, and they do not meet the above criteria, they will no longer be able to include these costs in their R&D tax credit claim. This will therefore reduce its value, unless new, UK based subcontractors or EPWs are sourced.
Compliance measures
The change: Further measures have been introduced by HMRC to address high levels of non-compliance in R&D tax credit claims, such as the Additional Information Form, increased enquiry rate from HMRC, and more.
Its impact: All companies are now required to submit an Additional Information Form in advance of submitting their R&D claim. This must include qualifying expenditure details and details of the projects being claimed for, as well as endorsement from a senior company officer.
Next steps...
- Get qualified and experienced R&D tax credit professionals to comprehensively support your claim – UMi users receive discounted access to Amplifi Solutions' service.
- Check out about more tax saving opportunities for your business.
- Email [email protected] or give us a call on 0330 124 7305 to discuss your business with one of our advisers.