The research and development (R&D) tax relief system is undergoing a significant overhaul, with the government unveiling a series of changes aimed at simplifying the relief. Effective from April 2024, the current R&D Expenditure Credit (RDEC) and SME schemes will be merged into a unified framework, promising a more streamlined approach to incentivising R&D activities across the UK to form a new Merged Research and Development Tax Scheme.
The Merged Research and Development Tax Scheme
One of the core objectives of the merged research and development tax scheme is to consolidate the existing RDEC and SME schemes, reducing complexity and ensuring a more cohesive experience for businesses seeking to capitalise on R&D tax reliefs. Under this new system, the rate at which loss-making or small profit-making companies are taxed will be reduced from 25% to 19%.
Furthermore, the credit available to companies will be a net cash benefit of up to 16%, however, it’s important to note that the revised scheme introduces a limitation on eligible expenses for subcontractors and externally provided workers, confining them to R&D activities carried out within the UK, with limited exceptions for ‘qualifying overseas expenditure.’
SME Intensive R&D Scheme
While the merged scheme aims to streamline the process, the government recognises the need to provide additional support for ‘High R&D Intensive’ businesses. As such, the current SME scheme will remain in place for these companies, offering an enhanced relief of approximately 27%. Notably, the intensity threshold (% of overall costs v R&D expenditure) in the R&D intensive scheme will be reduced from 40% to 30% for accounting periods starting on or after 1 April 2024, with a one-year grace period for companies that dip below the 30% threshold.
Expert Advisory Panel
To ensure the effective administration of the R&D tax reliefs, HMRC will establish an expert advisory panel. This panel will leverage insights from cutting-edge R&D occurring across key sectors such as technology and life sciences, working closely with HMRC to review relevant guidance and ensure it remains up-to-date and provides clarity to claimants.
Accounting Period starting on or after 1 April 2023
Changes in Relief Rates
Effective from April 2023, the RDEC rate has increased from 13% to 20%, while the additional deduction for SMEs has decreased from 130% to 86%, and the SME credit rate has reduced from 14.5% to 10%. However, for loss-making SMEs that are R&D intensive, the higher payable credit rate of 14.5% for qualifying R&D expenditure remains applicable.
Extension of Qualifying Expenditure
In recognition of the evolving nature of R&D, the scope of qualifying expenditures has been expanded to include the costs of datasets and cloud computing, reflecting the modern computational approaches to R&D activities.
Measures to Tackle Abuse and Improve Compliance
To ensure the integrity of the R&D tax relief system and combat potential abuse, HMRC has introduced several measures to enhance compliance. All claims for R&D reliefs must now be made digitally, and companies will need to inform HMRC in advance of their intention to make a claim.
Effective August 2023, all claims must be accompanied by a compulsory ‘additional information form,’ providing more detailed information about the claim. Additionally, new claimants must pre-notify HMRC of their intention to make a claim within six months of their year-end for accounting periods starting on or after 1 April 2023. Existing claimants may also need to pre-notify if no claim has been made for three or more years.
HMRC's Approach
One of the key aspects of HMRC’s approach is the need for detailed documentation and evidence to support R&D claims. This includes a breakdown and analysis of qualifying expenditure, evidence of payment for the costs included in the claim, and detailed documentation of the project’s activities and methodologies. Furthermore, HMRC’s focus on targeting error and fraud within the R&D regime is notable, leading to more rigorous checks and a greater risk of enquiries into existing R&D claims.
As businesses navigate this new landscape, it is crucial to stay informed and proactively adapt to the changes. By understanding the nuances of the merged scheme, eligibility criteria, and compliance measures, companies can position themselves to maximise the benefits of the R&D tax relief system and drive innovation forward.
The detailed guidance can be viewed here.