Changes to R&D Tax Relief from April 2024

Overview 📘

The R&D tax landscape has undergone several major reforms in recent years, but the changes coming into effect for accounting periods starting on or after 1 April 2024 are expected to mark the end of this phase of transition.

These reforms simplify how R&D claims are made, merge previous schemes, and introduce new provisions for R&D intensive companies and UK-focused expenditure.

🧩 The Merged Scheme

The Merged Scheme replaces the previous SME and RDEC schemes, creating a unified approach to claiming R&D tax relief. It shares several similarities with the former RDEC model but introduces more flexibility and higher potential cash benefits.

Key Features

• Taxable Credit: 20% of qualifying R&D expenditure
• PAYE and NIC Cap: £20,000 plus three times the company’s annual PAYE and NIC liability
• Subcontractor Costs: Limited companies can now be included (previously only SMEs could do this)
• Grants and Subsidies: No longer restrict your eligibility, you can claim R&D relief alongside other funding sources

💡 This simplification is particularly beneficial for companies with complex funding structures or collaborative projects.

💡 Enhanced R&D Intensive Support (ERIS)

In response to concerns from loss-making businesses about the reduction in R&D benefits, HMRC introduced a new scheme, Enhanced R&D Intensive Support (ERIS).

ERIS provides a non-taxable credit to loss-making SMEs that meet certain criteria:

Eligibility Criteria

• The company must be loss-making before applying the enhanced R&D deduction.
• At least 30% of total expenditure must be qualifying R&D costs.

Benefit

• Enhanced deduction: 86% of qualifying expenditure
• Payable credit: 14.5% (cash payment available by surrendering losses)

Just like the merged scheme, grants and subsidies don’t reduce your entitlement, and overseas expenditure is subject to new restrictions (see below).

📊 Potential Benefits

🌍 Overseas Expenditure Restriction

From 1 April 2024, HMRC introduced tighter rules to ensure that R&D tax benefits primarily support UK-based innovation.

Under both the Merged Scheme and ERIS, subcontractor and agency staff costs (known as Externally Provided Workers) are not allowable if the work is undertaken overseas.

Allowable Exceptions

The restriction does not apply if:

1. The required R&D conditions do not exist in the UK,
2. Those conditions do exist in the overseas location, and
3. It would be wholly unreasonable to reproduce those conditions in the UK.

For example, a company conducting agricultural R&D on tropical plant growth could claim costs for work done overseas if the necessary climate conditions aren’t replicable in the UK.

💡 The test of “wholly unreasonable” is based on each company’s individual circumstances and must be supported by clear documentation.

Other Considerations

• If an overseas entity carries out work physically in the UK, that cost may still qualify.
• For agency staff, payments must go through PAYE and Class 1 NIC to remain eligible.

🔍 Subcontracted R&D

HMRC has also clarified who can claim R&D tax relief in subcontracting relationships.

The company that makes the conscious decision, with the necessary knowledge and ability to oversee the R&D work, is the one entitled to make the claim.

✅ This clearer definition provides long-awaited certainty for both contractors and subcontractors about claim ownership.

📝 Pre-Notification Requirement

Since April 2023, certain companies must notify HMRC of their intention to make an R&D claim before submitting their tax return.

Key Points

• Applies to accounting periods starting on or after 1 April 2023.
• Must be submitted within six months of the period end.
• The window opens on the first day of the accounting period.
• Companies that have submitted an R&D claim within the last three years are exempt.

Example:

For a company with a 31 March 2025 year end, the notification can be submitted from 1 April 2024 to 30 September 2025.

Failure to submit the form means the R&D claim will be rejected, and HMRC will write to confirm its removal.

💬 Get in Touch

If you have any questions about these changes or need support with your R&D claim, please:

💬 Book a call with our R&D Tax Manager, Steph Watson:

📧 s.watson@barnesandscott.co.uk

🔗 Book a meeting with Steph

✅ Summary