R&D Tax Relief Revolution: Navigating the New Changes

Author: Michael Stead, Director – Innovation

Stay ahead of the curve with the latest updates in R&D tax relief legislation. Whether you’re an SME or a larger enterprise, here’s how the new rules could benefit your business’s innovative projects.

What’s changed?

In the 2023 Autumn Statement, the Government announced it would legislate in the Autumn Finance Bill 2023 to merge the current RDEC and R&D SME schemes for accounting periods beginning on or after April 1, 2024. The rate offered under the merged scheme will be implemented at the current RDEC rate of 20%.

Starting from April 1, 2024

Subcontracted & Externally Provided Workers (EPWs) must be from the UK with some exceptional circumstances. 

Is your company year-end on March 31?

Are you considering making a Research and Development (R&D) tax relief or expenditure credit claim for the first time for R&D work undertaken since April 1, 2023?

HMRC’s Advanced Notification rules from April 1, 2023, mean the clock is ticking for companies with a March 31 year-end if you’re claiming for the first time or haven’t made a claim in the previous three years (prior to October 2021). 

If you intend to make an R&D tax claim for your accounting period from April 1, 2023, to March 31, 2024 and haven’t claimed in the previous three years, you have until September 30, 2024 to submit the Advanced Notification paperwork. 

The Additional Information Form

Starting from August 8, 2023, companies must submit an ‘additional information form’ (AIF) to HMRC when claiming R&D tax relief. 

This must be done before submitting your corporation tax return. If you don’t, HMRC will remove your R&D claim from your return, and you won’t be able to resubmit it.

The number of projects you need to describe in the form depends on how many you’re claiming for:

• 1 to 3 projects: Describe all of them, ensuring they cover 100% of your qualifying expenditure.
• 4 to 10 projects: Describe enough projects to account for at least 50% of your expenditure, with a minimum of three projects.
• 11 or more projects: Describe enough projects to account for at least 50% of your expenditure, with a minimum of three projects. If your qualifying expenditure is spread across many smaller projects, describe the ten with the most qualifying expenditure.
• Claims must be filed digitally: Paper forms are no longer accepted.
• Senior officer approval required: A high-ranking official needs to verify the claim’s accuracy.
• R&D advisor disclosure: If you used an advisor, their details must be included.
• Failure to comply can lead to removal: Missing required information (like pre-notification) could result in your claim being rejected.

What happened for claims on or after April 1, 2023

• Pure Maths is now eligible.
• Data and cloud computing costs are now allowable expenses.
• If claims are incorrectly claimed under the SME scheme, they can be converted to RDEC.
• Pre-notification*. Certain companies must pre-notify HMRC of their intent to claim within six months from the end of their accounting period (see below). This rule was introduced for accounting periods beginning on or after April 1, 2023.
• Time limits for R&D claims: You must make R&D tax relief claims within two years of the end of the claim period.

*The new pre-notification requirement rule was introduced in April 2023. It applies to certain companies claiming R&D tax relief. Under this rule, companies must notify HMRC of their intent to claim R&D tax relief within six months from the end of their accounting period. 

The purpose of the pre-notification requirement is to give HMRC more time to assess claims and to prevent fraudulent claims. Companies that fail to comply with the pre-notification requirement will have their claims rejected.

SME RATE CHANGE 

Important news for small and medium-sized businesses (SMEs) involved in research and development (R&D), effective April 2023.

The Government has reduced the financial benefits you receive for your R&D efforts. The extra deduction was reduced from 130% to 86%, while credit was reduced from 14.5% to 10% (Surenderable losses are now lower than actual & 186% of qualifying expenditure). 

What this means in simple terms:

• 1. Profitable SMEs: Benefit reduced from 24.7% to 21.5%.

• 1. Loss-making SMEs: Benefit reduced from 33.35% to 18.6%.

• 1. Loss-making R&D intensive SMEs (spending at least 40% on R&D): Benefit reduced from 33.35% to 27%.

• The maximum benefit is still significant but lower than before.

Further details:

• The details of the specific tax relief scheme have changed (additional deduction and credit rate decreased).
• There’s an exception for highly R&D-focused SMEs who maintain a higher benefit rate.

If you’re an SME involved in R&D, consult with a professional to understand how these changes affect you and whether you qualify for the exception.

RDEC RATE CHANGE 

Good news for larger companies involved in R&D! 

The Government announced changes to boost their R&D tax benefits, effective April 2023:

• Increased gross RDEC rate: This rate increased from 13% to 20%, effectively increasing your potential claim.
• Main rate taxpayers: Your net benefit will rise from 10.53% to 15%, meaning bigger incentives.
• Bonus for smaller companies: This is even better news for companies with lower profits, who stand to gain an even larger benefit increase.

This “rebalancing” aims to encourage both large and small businesses to invest in R&D.

Conclusion

Embracing the updates in R&D tax relief legislation is certainly about compliance. However, it’s also about seizing an opportunity to fuel your company’s innovation engine. With strategic adjustments, both SMEs and larger enterprises can navigate these changes to maximise their R&D investments. Remember, the landscape of tax relief is evolving, but so are the possibilities for growth and breakthroughs. 

Ready to explore how these changes can benefit your projects? Contact our team at BAND for tailored advice and insights. Together, let’s unlock the full potential of your R&D endeavours and propel your business forward.