Understanding R&D Tax Relief Changes: A Brief Overview

Understanding R&D Tax Relief Changes: A Brief Overview

There have been significant changes to R&D Tax Relief, with adjustments taking effect for accounting periods starting on or after 1st April 2023, and further modifications coming into play on 1st April 2024. In summary, the alterations for 2023 rebalanced the rates, resulting in lower tax relief for businesses claiming under the R&D SME scheme, while those opting for R&D Expenditure Credit (RDEC) now receive more favourable rates. These changes reflect the government’s strong commitment to combat abuse and enhance compliance.

Understanding Relief Rates:

• Commencing April 2023, adjustments to relief rates within the SME R&D scheme resulted in a reduction of the additional deduction for SMEs from 130% to 86%, alongside a decrease in the SME credit rate from 14.5% to 10%. These alterations are applicable across the board, requiring companies to adjust proportionately based on their accounting periods.
• Similarly, the RDEC rate increased from 13% to 20% from April 2023, aligning with the government’s efforts to incentivise R&D activities.
• Looking ahead to April 2024, the implementation of the merged R&D scheme will establish a standard credit rate of 20% on all qualifying expenditure, regardless of business size.
• ‘R&D intensive’ SMEs, from April 2024, will qualify for R&D Tax Credits if their qualifying R&D spending constitutes at least 40% of total expenditure. This threshold is set to decrease to 30% from April 2024.

Changes for R&D Tax Credits from April 2023:

The 2022 Autumn Budget unveiled significant reforms to R&D Tax Credits, aimed primarily at enhancing protection against fraud and errors in claims. These measures, outlined below, introduce a more stringent framework for claiming R&D relief:

1. Digital Submission Requirement: All companies are now required to submit their R&D claims digitally. This shift to online submission streamlines processes and facilitates HMRC’s review and risk assessment procedures.
2. Supplementary Information: Each claim must include additional details supporting its validity, including a breakdown of R&D expenditure types. This enhanced level of information assists HMRC in conducting thorough risk assessments.
3. Named Company Officer Support: Greater scrutiny is placed on individuals submitting claims, requiring all claims to be supported by a named company officer. This measure mitigates the risk of unauthorized claims made in the company’s name.
4. Agent Details Disclosure: Each R&D claim must disclose details of any associated agents involved in the submission. Requiring agent details enhances transparency and allows HMRC to identify agents with a history of facilitating dubious claims.
5. Pre-Notification Requirement: First-time claimants or those who haven’t claimed in the last three financial periods must pre-notify their claim to HMRC online. This proactive step enables HMRC to educate companies on valid R&D processes and provides additional safeguards against illegitimate claims.
6. Expanded Qualifying Expenditure Categories: Qualifying expenditure now encompasses license payments for datasets and data analytics, as well as cloud computing costs. However, some expenditure for overseas subcontracting and Externally Provider Workers (EPWs) not paid through UK payroll is excluded under these reforms.

Anticipated Changes for R&D Tax Credits from April 2024:

Alongside the introduction of the new merged scheme, further reforms are expected to reshape R&D relief, as announced during the 2023 Autumn Statement. These changes include:

1. Discontinuation of the Qualifying Bodies List: The list of qualifying bodies, previously utilised by RDEC applicants for claiming contracted R&D costs, will be abolished for the new merged scheme. This provides large organisations with greater flexibility for their contracted projects.
2. Redirecting Relief to R&D Conductors: R&D Tax Credits will be directed to the company conducting the research and development, rather than the subcontracted company. However, the subcontracted company can potentially claim R&D costs for resulting R&D not related to the client’s initial project.
3. Redundancy of Subsidised Expenditure Rules: Changes to subcontracting render the rules regarding subsidised expenditure redundant, prompting their removal for the merged scheme as well.
4. Restrictions on Overseas R&D Expenditure: Overseas costs for EPWs, subcontractors, and contributions to independent R&D will no longer be eligible for R&D claiming, except where replicating the conditions in the UK is wholly unreasonable.
5. Direct Payment of Credit to Claimants: R&D relief payments will now be directed straight to claimants rather than a third party, eliminating the use of nominations.
6. Credit to be ‘Above the Line’: Under the merged scheme, the benefit will be ‘above the line,’ akin to RDEC, and considered taxable income. This provides greater visibility to key decision-makers, demonstrating how R&D can enhance profits and fostering further investment.

These comprehensive changes signify a concerted effort to strengthen the integrity and effectiveness of the R&D Tax Credits system, ensuring that public funds are allocated effectively and that innovation is appropriately incentivised.