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It has been a tumultuous 18 months in the world of Research & Development (R&D) tax relief with numerous changes to the administration of the SME and RDEC schemes as well as a huge increase in HMRC enquiry activity culminating in the introduction, for accounting periods starting on or after 1 April 2024, of a single merged R&D tax relief scheme for all companies.
Except, of course, in the world of tax it’s never quite so straightforward; a separate set of rules, and rate of relief, apply to R&D intensive companies so the single merged scheme is actually two schemes…
This article discusses these recent changes, which affect the rates of relief, the types of qualifying expenditure, the eligibility criteria, and the administrative requirements for claimants. We will also evaluate the impact of these changes on the profitability and feasibility of making a claim for R&D tax relief.
What has changed for R&D tax relief?
The short answer is just about everything. The fundamental definition of qualifying R&D activities that underpins the whole R&D tax relief regime remains, but some of the more important changes include:
Multiple changes to the rates of relief available under each scheme.
A widening of the types of expenditure that qualify for relief.
Restrictions to the circumstances in which R&D relief can be claimed for activities undertaken outside the UK.
New requirements for companies that have not previously claimed R&D tax relief to notify HMRC in advance of an intention to make a claim.
New requirements for all claimant companies to file an additional information form with HMRC before submitting the corporation tax return containing a claim for R&D tax relief.
New guidance for claimants setting out HMRC’s expectations around internal record keeping and the evidence required to support a successful claim.
A massive increase in the number R&D tax relief claims subject to enquiry by HMRC.
As the dust settles on these changes now is a good time to assess whether it is still worth making a claim for R&D tax relief.
What R&D tax relief is available?
The table below summarises the current rates of R&D tax relief available:
SME Scheme | RDEC Scheme | Merged Scheme | |||
| Up to 31/03/2023 | From 01/04/2023 | Up to 31/03/2023 | From 01/04/2023 | From accounting periods starting on or after 01/04/2024 |
Profitable company | 130% uplift on costs = net benefit £24.70 per £100 spend | 86% uplift on costs = £21.50 per £100 net benefit | Headline rate 13% = £10.50 per £100 post tax benefit | Headline rate 20% = between £14.70 - 16.20 per £100 spend* | Headline rate 20% = between £14.70 - £16.20 per £100 spend |
Loss making company | Costs plus 130% uplift = 230 x 14.5% repayable credit = £33.40 per £100 benefit | Costs plus 86% uplift = 186 x 10% repayable credit = £18.60 per £100 benefit | £10.50 per £100 benefit | £15 per £100 costs benefit | £16.20 per £100 spend |
Loss making R&D intensive company** | NA | Costs plus 86% uplift = 186 x 14.5% repayable credit = £26.97 per £100 benefit | NA | NA | NA |
*The post tax RDEC/Merged scheme rates from 1 April 2023 vary depending on the level of taxable profits and corporation tax (CT) rate suffered. The Net RDEC at the main rate of CT (25%) is 15%, for the small companies’ rate (19%) is 16.2% and for companies paying tax at the marginal rate (26.5%) is 14.7%.
**Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% (from 1 April 2023) or 30% (from accounting periods starting on or after 1 April 2024) of total expenditure.
Is it worth making a claim?
Some businesses who have claimed R&D tax relief in the past have questioned whether it is still worthwhile making a claim, and there is no denying that many companies will see a fall in the tax savings or tax credits received as a result of the changes summarised above.
Factor in the increased time costs of preparing the more detailed technical information now required by HMRC to support a claim, and the increased chance of having to deal with a protracted tax enquiry now that HMRC have committed substantial resources to policing the R&D tax relief schemes and it is easy to understand why some companies may initially at least decide not to make a claim.
As tax advisers we believe that would be a mistake: it is still possible to achieve net savings of up to £16.20 per £100 of qualifying R&D expenditure under the new merged scheme. The key to a successful claim is preparation: supporting documentation which clearly explains the background and technical detail of the R&D projects undertaken in the period is of the utmost importance in minimising the risk of an enquiry.
Our R&D tax relief team can work with you to ensure the appropriate records are maintained and produce the necessary financial analysis and narrative project descriptions for submission to HMRC.
Contact us to find out more about how we can help you claim R&D tax relief for your business.