The UK government introduced significant updates to the R&D tax credit scheme in 2024, affecting both small and medium-sized enterprises (SMEs) and large companies.
Read on to learn more about the changes and what they mean for your business.
1. Merged R&D Scheme & SME Intensive Scheme
The new 'Merged R&D Scheme’ comes into effect for accounting periods beginning on or after 1 April 2024. This largely does away with the separate RDEC and SME schemes.
The Merged Scheme will apply to all companies except for loss-making R&D intensive SME companies and is largely based on the current RDEC scheme.
2. Rates of relief
Please see the diagram below for a summary of the recent rate changes:
3. Enhanced relief for R&D-intensive SMEs
SMEs with Pre-April 2024 accounting periods that qualified as R&D intensive were entitled to surrender losses at a higher rate (increasing the cash value of making an R&D claim). The R&D intensive threshold was met if companies spent more than 40% of their total expenditure on R&D. Now for the Post-April 2024 accounting periods SMEs, this threshold has been lowered to 30%.
This change is designed to incentivise deep, innovative research efforts and to support businesses that are at the forefront of technological and scientific advancements.
4. Subcontracting rules
The new Merged Scheme expands eligibility for R&D tax credit claims to include costs for activities contracted out to any entity, unlike the current RDEC scheme that restricts claims to costs contracted to individuals, partnerships, or certain bodies like universities. Under the new rules, companies can claim 65% of the expenditure on contracted R&D activities, provided there is a predefined expectation of R&D work.
HMRC guidelines state that a detailed contract must outline the expected R&D activities. Costs of unexpected R&D activities performed under a contract are not claimable by the outsourcing company but may be claimable by the contractor.
For connected parties, costs claimable are the lower of what the outsourcing company incurred or the contractor's eligible costs. Group companies can elect to let the contractor claim these costs instead.
This update broadens R&D cost eligibility but introduces complexities that companies should consider carefully.
5. Stricter compliance and reporting
Another key change in 2024 is the tightening of compliance measures. HMRC has increased its scrutiny of R&D tax credit claims, particularly to prevent abuse and fraud within the system. This includes more rigorous checks and the introduction of new reporting requirements for claimants. Businesses are now required to provide more detailed documentation and evidence of their R&D activities, making it essential for companies to maintain thorough and accurate records and seek expert support with submitting accurate claims.
6. Focus on genuine innovation in the UK
The 2024 revisions to the R&D tax credit scheme aim to bolster genuine innovation and prevent misuse, ensuring that the scheme better targets companies engaged in true cutting-edge research.
To achieve this, the revisions also include a new territorial restriction, requiring that all expenditure for externally provided workers and subcontracted activities occur within the UK. Externally provided workers must be under PAYE, and subcontracted work must be performed domestically to qualify.
Exceptions are limited to scenarios where necessary conditions for the R&D do not exist in the UK and cannot be reasonably replicated. However, activities relocated outside the UK due to cost reasons or worker availability will not qualify.
Impact on Businesses
For businesses, these changes mean that while some may see a reduction in their relief, others, particularly those deeply invested in R&D, could benefit from enhanced credits. The increased compliance requirements mean that companies must be more diligent in their claims, ensuring that they are well-documented and justified.
The 2024 updates to the R&D tax credit scheme reflect the UK government’s commitment to refining the system, making it more robust, and ensuring it better serves its purpose of promoting genuine innovation. Businesses need to adapt to these changes, particularly by focusing on compliance and ensuring their R&D efforts are well-documented and strategically aligned with the new rules.
These changes may initially pose challenges, but they also offer opportunities for businesses that are truly invested in research and development. By understanding and adapting to these new rules, companies can continue to benefit from the R&D tax credit scheme and contribute to the UK’s innovative landscape.
Now more than ever, companies should seek expert advice to understand these ever evolving complex rules.
If you’re looking for support with your upcoming claim, reach out to our team.
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