The UK government has introduced significant changes to the R&D Tax Relief schemes, effective from April 2023, with further adjustments from April 2024. These changes are designed to streamline the system, improve compliance, and provide more targeted support for businesses driving innovation, particularly in sectors like tech and telecoms.
Key Changes from April 2023
R&D SME Scheme: The tax relief rate for businesses claiming under the SME scheme has been reduced to 21.5% (down from 25%). This reduction aims to minimise abuse of the scheme while maintaining support for genuine R&D activities. For early-stage tech start-ups, this shift may slightly reduce available funding, making it essential to ensure that claims are fully optimised.
R&D Expenditure Credit (RDEC): The RDEC rate has increased from 13% to 20%. This change indicates the government's preference for the RDEC scheme, which is often better suited to scale-ups and larger firms. If your business is moving from start-up to scale-up, you may find RDEC more beneficial in supporting your R&D activities as you grow.
Upcoming Changes from April 2024
Unified R&D Scheme: From April 2024, all businesses, including start-ups and scale-ups, will be part of a unified RDEC-like scheme. This simplified system will provide a credit rate of 20% for all qualifying R&D expenditure. The new structure eliminates the need to navigate separate schemes, making it easier for growing tech companies to access relief.
R&D Intensive SMEs: Start-ups and scale-ups classified as 'R&D intensive'—where R&D makes up at least 30% of total expenditure—will still benefit from a 14.5% rate on R&D Tax Credits. If your company is loss-making but heavily invested in R&D, this enhanced support can provide much-needed funding during your growth phase.
Why the Changes?
The government is focused on ensuring public funding supports innovation and reduces fraudulent claims. For tech and telecoms businesses, especially those scaling rapidly, understanding these changes is critical. Historically, the RDEC scheme has delivered a stronger return on investment, with every £1 of support generating £2.40 to £2.70 in additional R&D expenditure, compared to just £0.60 to £1.28 for the SME scheme. This shift is likely to benefit more established scale-ups with larger R&D projects.
Other Noteworthy Changes (from April 2024)
Overseas R&D Restrictions: If you outsource R&D to overseas partners, you’ll need to factor in the new restrictions on overseas R&D expenditure. Exceptions will be rare, so it’s important to reassess your R&D strategy to maximise UK-based activities.
Simplified Relief: The removal of qualifying bodies and subcontractor payments simplifies the process, allowing more direct control over your R&D claims.
Financial Impact: The new scheme will have a direct impact on financial KPIs, as the credit will now be counted as taxable income, improving measures like EBITDA—an important consideration as you attract investors or prepare for further rounds of funding.
Government Commitment to Tech & Telecoms R&D
The UK government is committed to driving innovation across sectors, especially in tech and telecoms, which are key to the country’s future growth. With R&D funding set to increase to £20 billion annually by 2024-25, now is the time to ensure your business is fully leveraging these opportunities.
Ensuring Compliance
As the system becomes more streamlined, the focus on compliance intensifies. Start-ups and scale-ups in the tech space must ensure that claims are robust, accurate, and compliant with HMRC guidelines. Partnering with a trusted R&D advisor, like Leyton, can help you navigate these changes, maximise your claims, and stay compliant with evolving regulations. In particular, ensuring suitable compliance will go hand in hand with a verifiable methodology justifying how the costs related to the claim are relevant to the technical work being claimed. Companies should be able to evidence the approach taken to align these elements and under more thorough scrutiny from HMRC this element could become an important focus; especially for companies engaging in development activity that resides outside R&D. Being able to draw a distinction between these types of project will be important for justifying the overall R&D claim.
