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 aim to streamline the system, improve compliance, and enhance support for innovation.
Changes Effective from April 2023
R&D SME Scheme: Businesses claiming under the SME scheme now receive a lower rate of tax relief (21.5% down from 25%). This change is part of the government's efforts to reduce abuse and improve compliance within the scheme.
R&D Expenditure Credit (RDEC): The rates for RDEC have been increased (20% up from 13%). This shift reflects the government's preference for RDEC, which has shown higher effectiveness in driving private sector R&D investment compared to the SME scheme.
Changes Effective from April 2024
Unified R&D Scheme: From 1 April 2024, a single RDEC-like R&D Tax Relief scheme will replace the existing dual system. This new scheme applies to all businesses, regardless of size, and aims to simplify the process and align the UK more closely with international standards.
Merged Credit Rate: Under the new scheme, the credit rate is set at 20% for all qualifying expenditure. This applies to all businesses, except for loss-making ‘R&D intensive’ SMEs.
R&D Intensive SMEs: SMEs are considered 'R&D intensive' if their qualifying R&D spending constitutes at least 30% of their total expenditure. This threshold was reduced from 40% in April 2024. Loss-making SMEs meeting this criterion can claim R&D Tax Credits at a rate of 14.5%.
Rationale Behind the Changes
The reforms aim to ensure that public funds are used effectively to support innovation and reduce fraud and errors, particularly prevalent in the SME scheme. According to HMRC, the error and fraud rate for the SME scheme was 7.3%, significantly higher than the 1.1% for RDEC.
The RDEC scheme is favoured due to its higher return on investment. Studies by HMRC show that every £1 of support through RDEC generates £2.40 to £2.70 in additional private R&D expenditure, compared to £0.60 to £1.28 for the SME scheme.
Additional Changes from April 2024
Discontinuation of the Qualifying Bodies List: The list of qualifying bodies for contracted R&D costs will be removed, offering more flexibility for large organisations.
Relief Redirection: R&D Tax Credits will now be received by the company conducting the R&D rather than subcontractors.
Redundant Subsidised Expenditure Rules: With changes to subcontracting, rules regarding subsidised expenditure will be removed.
Restrictions on Overseas R&D Expenditure: Overseas costs for externally provided workers, subcontractors, and contributions to independent R&D will generally be ineligible, except where it is wholly unreasonable to replicate conditions in the UK.
Direct Credit Payment: Credits will be paid directly to claimants, eliminating the use of nominations for third-party payments.
Above the Line Credit: The benefit will be seen as taxable income, positively impacting financial KPIs such as EBITDA.
Government Commitment to R&D
The government remains committed to boosting R&D as a driver of economic growth. Public funding for R&D is set to increase to £20 billion annually by 2024-25, marking the largest increase in R&D funding to date.
Ensuring Compliance
With the enhanced focus on compliance, businesses must ensure their R&D Tax Credits claims are robust and compliant. Partnering with reputable providers can help navigate these changes effectively. Leyton, with 25 years of experience, offers expertise to help businesses maximise their eligible benefits and maintain compliance with HMRC regulations.
