How R&D Tax Credits are changing from April 2023 and April 2024

  • By Louis Power
    • Jan 31, 2024
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R&D Tax Credits

There have been a series of significant R&D Tax Relief changes that came into effect for accounting periods starting on or after 1st April 2023, with further changes coming in on  1st April 2024.

In brief, the 2023 rates were rebalanced so that businesses claiming under the R&D SME scheme now receive a lower rate of tax relief, while those claiming R&D Expenditure Credit (RDEC) secure more generous rates. The changes emphasise a strong drive from the government to tackle abuse and improve compliance.

A key driver behind the changes for 2024 was simplifying R&D relief in the UK. As well as this, the UK was considered to be “unusual” internationally for having two different R&D relief schemes so the changes have been designed to bring the UK closer in line with our countries’ systems. The result is a new single RDEC-like R&D Tax Relief scheme for all (including large organisations as well as SMEs), which comes into effect for accounting periods starting on or after 1 April 2024.

In this article, we explain how R&D Tax Credits are changing for the 2023 and 2024 accounting periods.

What are the rates of reliefs for the SME R&D scheme from April 2023?

For expenditure starting on or after 1 April 2023, the additional deduction for SMEs decreased from 130% to 86%, and the SME credit rate reduced from 14.5% to 10%.

This is regardless of when your accounting period began, so companies whose tax year extends beyond 1 April 2023 must apply the changes pro rata. For example, if your accounting period ended on 30 June 2023, your expenditure from 1 July 2022 to 31 March 2023 would receive the old rates and your expenditure from 1 April 2023 to 30 June 2023 would receive the new rates.

While the relief is less generous, it’s important to view the 2023 changes as a whole. For example, from April 2023, Corporation Tax increased to 25% for companies with over £250,000 in profits, which results in just a £3.20 difference in R&D Tax Credits for every £100 spent.

What are the rates of reliefs for RDEC from April 2023?

For expenditure starting on or after 1st April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%. As with the SME R&D scheme, this must be applied pro rata if your accounting period crosses beyond 1 April 2023.

What are the rates of relief for the merged R&D scheme from April 2024?

For expenditure for accounting periods starting on or after 1st April 2024, the merged credit rate will be 20% on all qualifying expenditure. This will be for all qualifying businesses regardless of their size (except for loss-making ‘R&D intensive’ SMEs – see below).

Example changes to R&D Tax Credits

What are the relief rates for the R&D intensive scheme?

For accounting periods on or after 1st April 2023, SMEs are now considered to be ‘R&D intensive’ if their qualifying R&D spending makes up at least 40% of their total expenditure during their financial year. However, this will change from 1st April 2024 when the intensity threshold will be lowered from 40% to 30%.

Companies that fail to meet this R&D intensity threshold (due to unexpected circumstances) will be given a one-year grace period so that they don’t yo-yo back and forth between qualification. This means they can still claim the benefit, provided they met the intensity threshold and successfully claimed R&D intensive support in the previous year. SMEs that are not making a profit but meet the R&D intensity threshold can claim R&D Tax Credits at a rate of 14.5% for qualifying expenses incurred for accounting periods or after 1st April 2023. The 14.5% rate is expected to remain during 2024.

Why is R&D relief changing?

The UK Government has said that the R&D Tax Credits are being reformed “to ensure public money is spent effectively and best supports innovation”. In other words, the reforms are meant to tackle wastage and increase lucrative R&D activity, leading to private investment and economic growth.

The changes to the SME R&D scheme come in the face of increased scrutiny against claims due to reports of fraudulent tax relief claims. HMRC’s Annual Report and Accounts for the financial year 2021 to 2022 estimate that under the SMEs scheme there was a 7.3% level of error and fraud compared to just 1.1% for the RDEC scheme, which totals £469 million (£430 million from the SME R&D scheme and £39 million from the RDEC scheme).

More importantly, the RDEC scheme is seen by the Treasury as more effective at driving ground-breaking innovation, building important assets within UK-based companies, and delivering better value for the British tax payer. The most recent studies from HMRC, published in 2019 and 2020, show that for every £1 of support, the RDEC incentivised £2.40 – £2.70 of additional private R&D expenditure, and the SME scheme incentivised £0.60 – £1.28.

As well as boosting a scheme that the government sees as successful, the relief rates have been increased because RDEC needed reform to make it more competitive internationally.

What else is changing for R&D Tax Credits from April 2023?

Several other important changes to R&D Tax Credits were announced in 2022’s Autumn Budget. Most measures are designed to improve protection against fraud and errors in R&D claims. The measures state that:

1) Claims must be submitted digitally

All companies must submit their R&D claim online. Mandating digital submission for all R&D-related expenses makes it easier for HMRC to review information and conduct risk assessments.

2) Claims must include additional information

All claims must include additional information to support claims, such as a breakdown of the types of R&D expenditure. Again, this measure helps HMRC conduct risk assessments

3) Claims must be supported by a named officer of the company

A higher level of scrutiny is being placed on precisely who is submitting the claims, meaning that all claims must be supported by a named officer of the company, protecting against unauthorised claims being taken in the business’s name.

4)Claims must include details of any associated agents

Each R&D claim must include details of any agents associated with the submission. Requiring details of any agent associated with the claim allows HMRC to spot the involvement of agents with a track record of facilitating spurious claims.

5) Claims must submit a pre-notification of their claim, if companies are new claimants or have not claimed in the previous 3 accounting periods

First-time relief-claiming businesses (or businesses who have not claimed in the last three financial periods) must submit a pre-notification of their claim to HMRC online. This gives HMRC the opportunity to take proactive steps in educating companies on valid R&D processes and also provides extra safeguards against reliefs being illegally claimed. Find out more about pre-notification by reading our white paper R&D Tax Relief Is Changing: Is your business ready for Pre-Notification?.

6) There are expanded categories of qualifying expenditure

Qualifying expenditure has been reformed to include licence payments for datasets and data analytics and cloud computing costs and exclude some expenditure for overseas subcontracting and Externally Provider Workers (EPWs) not paid through UK payroll.

What else is changing for R&D Tax Credits from April 2024?

As well as launching the new merged scheme, there were other important changes to R&D relief announced during the 2023 Autumn Statement, including:

1) The qualifying bodies list is being discontinued

The list of qualifying bodies, which RDEC applicants would have previously used if they wanted to claim contracted R&D costs, is being removed for the new merged scheme, giving large organisations much more choice for their contracted projects.

2) Relief will be redirected to those carrying out R&D

R&D Tax Credits will be received by the company that conducts the research and development instead of the subcontracted company(although, the subcontracted company can potentially claim R&D costs for any resulting R&D that isn’t connected to the client’s initial project).

3) Subsidised expenditure rules have become redundant

The changes to subcontracting mean that the rules regarding subsidised expenditure (which relate to the SME scheme) become redundant, so they are also being removed for the merged scheme.

4) There will be new restrictions on overseas R&D expenditure

Overseas costs for externally provided workers (EPWs), subcontractors and contributions to independent R&D (e.g., payments to universities) will no longer be eligible for claiming R&D, except where it is wholly unreasonable to replicate the conditions in the UK

5)The credit will be paid directly to the claimant

The use of nominations will end, meaning that R&D relief payments will now go directly to claimants, rather than a third party (such as an R&D Tax Credit service provider).

6) The credit will be ‘above the line’

The benefit will be ‘above the line’ under the merged scheme, which means like RDEC it will be seen as taxable income. This has the bonus of positively effecting financial KPIs such as earnings before interest, taxes, depreciation, and amortization (EBITDA). HMRC saw this as a way of giving more visibility to key decision-makers, showing how R&D can boost profits therefore driving further investment.

What does “for accounting periods beginning on or after” mean?

The phrase “for accounting periods beginning on or after 1 April 2024” can sometimes cause confusion. It relates to the starting point of your business’ accounting period (the timeframe for where your Corporation Tax is calculated). Changes that apply “for accounting periods beginning on or after 1 April 2024”, come into effect for the start of the accounting period that starts on or after this date – even if that is in May, June, July or later.

For example, if you are claiming R&D Tax relief Through the SME scheme and your current accounting period ends on 30 June 2024, the new merged R&D scheme rules would apply to your business from 1July 2024. Before this date, the previous accounting period’s rules would still apply.

How much money is the UK Government committing to R&D spending?

The government still sees R&D as essential to stimulating private sector investment and growing the UK economy. As such, they’re increasing public funding to £20 billion annually by 2024-25 (the largest increase in R&D funding ever).

How can I ensure that my R&D Tax Credits claim is compliant?

HMRC’s new focus on improving compliance invariably means more ‘red tape’ for businesses to navigate and more personal culpability for company directors as claims must now be endorsed by a named senior officer. To avoid HMRC enquiries on your R&D claim, it is now imperative that businesses claiming R&D Tax Credits should partner with an established, reputable provider to ensure compliance throughout this period of change.

At Leyton, we’ve worked for twenty-five years, helping over 26,000 innovative companies put together robust and compliant claims. Our highly qualified tax experts and technical consultants can help your business navigate the coming changes, ensuring you receive the maximum benefit that your business is eligible for in full compliance with HMRC.

Speak to a specialist today to find out how the coming changes will affect your R&D Tax Credits claim.

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Louis Power

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