Changes to R&D Tax Relief from April 2024

The R&D Tax Relief landscape has changed quite a bit over the last few years. We are expecting these to be the last major changes to be announced for a while. At the same time we hope HMRC will continue to improve their guidance and information around the scheme!

In this article we will look at important changes for accounting periods starting on or after 1st April 2024.

Merged Scheme

This is the new main scheme for company's to claim tax relief. It has similar characteristics to the old Large Company Scheme (Research and Development Expenditure Credits - "RDEC") but also has some new features.

Most importantly, the benefit is a Taxable Credit of 20% of Qualifying Expenditure. Previously this would be capped by the PAYE and NIC of Staff with R&D Activity, but now this scheme gets the PAYE and NIC Cap of:

• £20,000 plus
• 3 x Annual PAYE and NIC Liability

Meaning there is a greater chance of being able to take out cash, provided all tax liabilities are settled.

Subcontractor costs can now include Limited Companies, previously a unique feature for SME Claims. However, please see the Overseas Expenditure segment below for other restrictions.

Grants and Subsidies do not impact the ability to claim this scheme. You can get a benefit from the Merged Scheme as well as a 100% grant for the project. This is a welcomed simplification!

Enhanced R&D Intensive Support ("ERIS")

HMRC had sought to merge the R&D schemes into one easy scheme, but with the push back against the significant reduction in benefit for loss making companies, they decided to include this additional scheme.

This scheme is here to give loss making SMEs a non-taxable credit, but only if they meet certain criteria, which is:

• Loss making before applying the enhanced R&D tax deduction
• At least 30% of total expenditure is qualifying R&D costs

Companies that qualify will receive an 86% enhanced deduction, much like the old "SME" R&D scheme, and they have the opportunity to surrender losses (trade them in) for a cash payment at 14.5%.

As with the Merged Scheme, grants and subsidies do not impact this claim and overseas expenditure is potentially not qualifying for subcontractors and agency staff ("externally provided workers").

Potential Benefits from the New Schemes

Overseas Expenditure Restriction

This restriction applies to accounting periods starting on or after 1 April 2024.

Brought into place by the Government to keep the benefits of the R&D Tax Claims within the UK, both new schemes include a potentially complex restriction on overseas expenditure for subcontracted and agency staff ("externally provided workers") costs.

In short, if the work is undertaken overseas, then the cost is not allowable under the schemes. However, it is not quite that simple.

One consideration is that you could be paying an overseas entity, but if the work undertaken is physically in the UK this is allowable. For agency staff, there would need to be payments made under PAYE and Class 1 NIC to be allowable. For example, you could pay a US entity for labour, but if they have a UK subsidiary who provide the staff conducting the R&D that are paid until UK tax laws, the expense would be allowable.

The other consideration is whether the overseas expenditure is exempt from the overseas restriction by meeting the following criteria:

• The conditions necessary for R&D are not present in the UK;
• The conditions are present in the location where R&D is undertaken; and,
• It is wholly unreasonable to replicate the conditions in the UK.

An example of this might be research and development work in relation to plants and vegetation growing in humid climates. If the necessary weather conditions are not present in the UK, and the R&D must be conducted in a warmer climate, i.e. nearer the equator, then the overseas exemption would not apply and the related costs would be allowable.

This idea of reasonable or wholly unreasonable is based on the individuals company's judgement as everyone's circumstances vary and therefore some judgement may be required.

Subcontracted R&D

Historically, where there is a customer and subcontractor relationship, it has not always been clear who is entitled to make the R&D claim - it could either be the contractor or the subcontractor. Fortunately, HMRC have provided a specific and clear way of identifying who can claim R&D.

The entity that makes the conscious decision, with the knowledge and ability to appreciate the R&D, to undertake the activities can make the R&D Tax Claim.

This may not sound exciting but in truth having clearer guidance on any aspect of R&D is great news for all companies operating in this field.

Pre-Notification

The Pre-Notification Form is a simple administrative task HMRC have introduced that is required for R&D Tax Claims submitted for periods starting on or after 1st April 2023. There are exemptions based on the timing of previous R&D Tax Claims made.

The Pre-Notification form can be submitted from day one of the period up until six months after the end of the period. For example, for a 31st March 2025 year end, the form can be submitted from 1st April 2024 to 30th September 2025. 

If you do not submit the Pre-Notification form, any R&D Tax Claims submitted in the period’s Tax Return will be removed and HMRC will write to inform you.

If you have any queries, please contact our R&D Tax Manager Steph who will be happy to answer your queries.

Email: s.watson@barnesandscott.co.uk

Meeting Link: Speak to Steph