In the March 2023 budget, changes to the two Research and Development (R&D) tax relief schemes were announced, which came into effect from 1 April 2023. At the same time, plans were also proposed to merge the two schemes into one which would come into effect twelve months later.
After consultation, the two schemes have now merged into one, which is largely based on the R&D Expenditure Credit (RDEC) scheme from 1 April 2024. This was the scheme mainly used by larger firms and gave lower returns for companies, compared to the SME scheme.
What is R&D relief?
This is a tax relief available in the UK for businesses which invest in qualifying R&D activities. The scheme is designed to encourage investment in R&D and help ensure UK businesses are at the forefront of global scientific and technological advancements.
Overall, the rules regarding project eligibility and expenditure qualifications have not changed with the merged scheme. Companies can claim for enhanced tax relief on qualifying expenditure, directly relating to projects which seek to advance scientific or technological understanding in the respective field.
This cannot just be an advancement in the company’s knowledge, it must be new for the global industry. The advancement could be something completely new or it might be using existing technology in a completely new way.
The merged Scheme – R&D Expenditure Credit (RDEC)
All claims relating to periods after 1 April 2024, will only be able to claim under the Merged Scheme as per the changes to R&D tax relief schemes 2024.
This works in the same way as the old RDEC scheme so companies can claim a tax credit of 20% of the qualifying expenditure.
Just to make it more complicated, the tax credit itself is taxable. The post tax credit is then available to offset against the company’s corporation tax. The effective relief, as a percentage of R&D spend changes depending on the companies underlying corporation tax rate.
Corporation tax rate Relief as % of R&D spend
19% 16.2%
25% 15%
26.5% 14.7%
If the company is loss making, there are six steps to go through before the company will be paid out any money. The steps are:
- Offset against current year corporation tax liability
- Restricted to amount net of tax (balance can be carried forward to future years)
- Calculate the PAYE and NIC restriction (see below)
- Offset against prior years corporation tax liability
- Offset against group corporation tax liabilities (optional)
- Offset against other HMRC liabilities such as PAYE & NIC and VAT (Optional)
- The remaining balance can be repaid, if the company is a going concern
For accounting period before 1 April 2024, you will need to consider if you are claiming under the old SME scheme or the RDEC scheme which works as above, although for periods before 1 April 2023 the tax credit rate was even less (13%).
PAYE & NIC cap (step 3)
As explained above, there is PAYE and NIC cap of £20,000 plus three times the company’s total PAYE and NIC liability which will be applicable in most circumstances. This is not just on the total liability for R&D qualifying staff. Any unused cap in a year would be available to carry forward for later years.
Enhanced R&D intensive support
Within the merged scheme there are special rules, similar to the old SME scheme as announced in the changes to R&D tax relief schemes 2024.
It applies to SME companies with 30% or more of their relevant revenue expenditure being R&D expenditure. This test is applied to all connected group expenditure not just the lone company.
To avoid companies from having to enter and exit this scheme repeatedly, HMRC has allowed a one-year grace period.
Qualifying companies can claim an 86% uplift on qualifying expenditure against taxable profits and if this creates a loss, the company can claim this back as a tax credit at 14.5% of the sacrificed loss.
Subcontractor costs
From 1 April 2024 and following changes to R&D tax relief schemes 2024, only the company which decided to undertake the project will qualify for the relief. Subcontractors will no longer be able to claim.
Where companies do use contractors, it will be important to confirm who is entitled to claim the R&D relief before starting the project.
As before companies, can claim 65% of subcontractor costs where they are able to claim. There are different rules to follow if the companies are connected to avoid inflating claims.
Overseas expenditure changes
In the autumn statement 2022, plans to eliminate overseas expenditure from qualifying for the old R&D schemes were announced. In the 2023 spring budget this was brought in form 1 April 2024.
Contracted-out costs are going to be subject to restrictions preventing them from qualifying when the activity takes place abroad, although some exceptions will be allowed where it would be impossible to conduct the work in the UK.
Other qualifying expenditure
The different types of expenditure relating to the relevant project which would qualify would cover:
- staff costs, including Employers NIC and Pension costs,
- externally provided workers, although in most cases only 65% of the cost would qualify.
- consumable items, like materials, power and water,
- software costs and licences, including data storage
Fixed assets do not qualify, although there is a separate R&D capital allowance scheme for assets used for qualifying R&D work. Also, rent and rates would not qualify.
How to make a Claim?
The main changes to R&D tax relief schemes in 2024, required companies to submit a notification to HMRC no later than 6 months after the end of their accounting period if they are making their first claim or their first claim in 3 years.
If the notification is not made in time the company will not be able to claim for that period!
Advanced assurance
Companies making their first claim with turnover of £2 million or less and have fewer than 50 employees, can apply to HMRC for advance assurances regarding their claim. If accepted, HMRC will then approve the first three years’ claims.
Additional information form
Companies are also required to submit an “R&D Additional Information form” which details project and the uncertainties to be overcome along with a breakdown of the cost being claimed.
The name of the person within the company who is taking responsibility for the claim and details of any agent who has helped in preparing the claim needs to be included.
This needs to be filed before the tax return in which the actual R&D claim is submitted. If this is not filed first, HMRC will automatically reject the claim in the return.
The actual claim
The claim for R&D expenditure credit is then submitted with the company’s corporation tax return and the formal R&D report would be attached to this submission.
The normal filing rules apply, 12 months after the company’s accounting period end for the tax return to be filed and 24 months after the accounting period end for amended tax returns.
What Should companies do next?
Please contact our expert Ian Meaburn at ian.meaburn@myersclark.co.uk who will be happy to help work out if you have a genuinely qualifying project and if the likely return from making the claim will more than cover the costs involved in making it.
We have a proven track record of successfully processing numerous claims with HMRC, consistently delivering outstanding results for our clients.