Changes to R&D Tax Credits in April 2024: Impact on UK Businesses

If you follow the R&D tax credit industry, either as an innovative business or an accounting professional, you’ll know that change has been in the pipeline since 2022. On 1st April 2024, that change arrived.

In this article, we will explore what changed and how it will impact you as an innovative UK business. We will also cover other R&D tax relief changes that occurred in the year before.

Why is the R&D tax relief regime changing?

There has been heightened scrutiny on R&D tax relief for several years, including a review launched at Budget 2021, and most recently a National Audit Office report published in January 2024.

Many of the changes we will discuss have been introduced to support or in some cases pre-empt findings. The intention is to:

• Simplify the R&D tax relief landscape by bringing most claims under a single merged research and development expenditure credit (RDEC) scheme
• Crackdown on reportedly widespread error and fraud
• Expand the cost base which can be included in a claim to reflect current R&D practice.
• Provide enhanced relief for R&D-intensive SMEs.

What are the new R&D rates from April 2024 under the merged scheme?

The merged RDEC scheme has a single rate of 20% above-the-line credit. It is applicable for claims for accounting periods which commence after 1 April 2024. This means that after tax, based upon a corporation tax rate of 25%, the benefit will be 15% of your qualifying R&D expenditure. Depending on your profits you may pay a lower rate of corporation tax, as low as 19%. In this case, the post-tax benefit would be 16.2%.

Additionally, introduced since April 2023 and retained going forwards after the latest R&D changes, is a special scheme for select SMEs who spend a high proportion of their expenditure on R&D and are loss making. Under this enhanced intensive R&D scheme (ERIS), the benefit can be worth up to 27%.

Below is a breakdown of all the current rates vs the new rates from 1st April 2024.

SME R&D tax incentive rates

Before 1st April ’231st April ’23 to 31st March ’24Loss making SMEUp to 33.3%Up to 18.6%Profit making SMEUp to 24.7%Up to 21.5%R&D intensive SME—Up to 27%

RDEC rates

Before 1st April ’231st April ’23 to 31st March ’24Loss making SME10.5%15%Profit making SME10.5%Up to 16.2%Large company10.5%Up to 16.2%

Rates from 1st April ’24

Merged schemeSME intensive schemeLoss making SME16.2%—Profit making SMEUp to 16.2%—Large companyUp to 16.2%—R&D intensive SME—Up to 27%

What are the RDEC rates?

As mentioned, the RDEC rate is 20% of above-the-line credit. To put this in context, prior to April 2023 the RDEC rate was 13%. Therefore, for companies with a history of claiming under RDEC, the scheme has become considerably more generous.

This is not the case for SME companies accustomed to claiming under the old SME schemes. These were calculated in a different way to RDEC, but used to be worth up to 33% of qualifying R&D expenditure. In April 2023 this was reduced to a maximum of 21.5%.

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

The scheme for R&D-intensive SMEs is formally called enhanced R&D-intensive support (ERIS). To qualify you must spend at least 30% of your total costs on qualifying R&D activity and be loss-making. Between 1 April 2023 and 31 March 2024 the bar was higher – your R&D expenditure must have been at least 40%. Additionally, a grace period allows you to qualify if you met this condition in your previous 12-month accounting period and successfully claimed SME relief or ERIS during that time for expenditures made on or after 1st April 2023.

Under the scheme you can deduct an additional 86% of your qualifying costs on top of the normal 100% deduction shown in your accounts, making a total deduction of 186%. You can then claim a payable tax credit worth up to 14.5% of your surrenderable loss which is not subject to tax. This is equivalent to a total benefit of up to 27% of your qualifying expenditure. You can read more about ERIS here.

An example of how much you can claim under the new schemes

Under the new RDEC scheme, you can claim a tax credit of 20% of your qualifying R&D expenditure. We’ll look at what qualifies later in this article as there have been some changes here too.

RDEC

Say you had £100,000 of qualifying R&D expenditure, once you have added everything up which you can include. You multiply this by the expenditure credit rate:

£100,000 x 20% = £20,000

You then show your expenditure credit of £20,000 as taxable income in your profit and loss account.

Corporation tax will be applied at your prevailing rate – 25% (sliding down to 19% if profitability is lower). This results in the post-tax benefit to you being between 15% and 16.2%.

Once corporation tax has been applied you can use the remaining sum (for instance £15,000 if your tax rate is 25%) against any remaining corporation tax liability, other tax liabilities or, if there is none, the final amount will be paid to your company.

RDEC

Say you had £100,000 of qualifying R&D expenditure, once you have added everything up which you can include. You multiply this by the expenditure credit rate:

£100,000 x 20% = £20,000

You then show your expenditure credit of £20,000 as taxable income in your profit and loss account.

Corporation tax will be applied at your prevailing rate – 25% (sliding down to 19% if profitability is lower). This results in the post-tax benefit to you being between 15% and 16.2%.

Once corporation tax has been applied you can use the remaining sum (for instance £15,000 if your tax rate is 25%) against any remaining corporation tax liability, other tax liabilities or, if there is none, the final amount will be paid to your company.

Enhanced R&D Intensive scheme (ERIS)

Using the same example of £100,000 qualifying expenditure for ERIS, you would deduct an additional 86% (on top of your 100% deduction) to calculate an adjusted trading loss.

£100,000 x 1.86 = £186,000

So £186,000 would show in your accounts as the adjusted trading loss. You can then claim a payable tax credit worth up to 14.5% of your surrenderable loss. This is not subject to tax.

£186,000 x 14.5% = £26,970.

So the payable tax credit you can receive in this example is £26,970.

What is changing for R&D tax relief aside from the rates?

While the merged R&D tax credit schemes and their rates are the main change, there have been a number of other developments which are important to consider alongside the April 2024 changes to R&D tax credits. These could be usefully categorised as technical changes and procedural changes.

We’ll cover the technical changes shortly. Procedurally, in the last 12 months the following has changed:

Advanced notification (since April 2023) – The advanced notification requirement means you will have to pre-notify HMRC of an intention to claim if you are new to claiming R&D tax relief or your last claim was made more than three years prior to the last day of your claim notification period. These normally last from the start of an accounting period for 18 months. We have an article which explores this in more depth here.

Additional information form (since 8 August 2023) – In August 2023 it became necessary to complete an R&D additional information form. This features a prescribed list of information about a claim that must be included, otherwise the claim will automatically be rejected. You can read more detail about the additional information form requirements here.

HMRC process – After the discovery of widespread error and fraud, HMRC has reformed its processes and KPIs, allocating many more tax inspectors to the task. Additionally, there has been a notable increase in the number of R&D tax credit enquiries being opened, reflecting heightened scrutiny and more rigorous assessment of claims to ensure compliance and accuracy.

How to calculate how much R&D tax relief you can claim

We have looked at the numbers and calculations above. Now let’s explore how you reach those numbers, your level of qualifying expenditure – and recent changes here. How you calculate how much R&D tax relief you can claim is based upon qualifying  R&D activity and qualifying expenditure spent when carrying it out.

The definition of what counts as R&D for R&D tax relief purposes has not changed.

You need to be taking a risk to “resolve scientific or technological uncertainties” which could be done when creating new products, processes or services; or changing or modifying an existing product, process or service. Whether your R&D is successful or not is irrelevant to your claim. But you need to be a UK limited company subject to corporation tax and be spending money on R&D activity.

What expenditure qualifies?

Since the 1 April 2023, there have been changes to what expenditure qualifies to be included in an R&D tax credit claim. In the main, the changes have been positive for companies which are claiming, but there are exceptions where qualifying expenditure has been restricted.

Contracted out R&D

In what will be a major R&D tax credit change for some, contracted out R&D must now be claimed by the contractor. Previously, the subcontractor could claim it. As well as the material change of claimant, this may also affect commercial agreements in which R&D is involved as the dynamics of cost shift. It is essential for companies engaging in such R&D to be willing risk-takers, as the shifting landscape requires adaptability and the courage to invest in innovation despite potential uncertainties. Read about this change to subcontractors in more detail here, including examples of the new guidelines in practice.

Consumables

Consumables have been an acceptable qualifying cost within an R&D tax credit claim for years and nothing has changed. Examples include the cost of power, water, materials and fuel. They must be used up, though, to qualify. If you are somehow able to sell or transfer the ownership of a consumable, it cannot be included.

Clinical trials volunteers

If your R&D is within pharmaceuticals, you may include the payments made to clinical trial volunteers within your R&D tax credit claim. This is unchanged in 2024.

Data licence and cloud computing

Data licences and cloud computing are a new category of qualifying R&D expenditure, reflecting their role in the modern world. For your accounting periods which began after 1 April 2023, you can include the relevant costs of a data licence and cloud computing.

Relevant cloud computing is defined as data storage, hardware facilities, operating systems and software platforms. A data licence is defined as a licence to access and use a collection of digital data. Where such costs are spent on qualifying indirect activities they cannot be included in your claim.

Externally provided worker costs

There are no R&D tax relief changes relating to externally provided workers, such as those provided by an employment agency. The rules are that you can claim for 100% of any relevant payments if the staff provider and your company are connected; and 65% if there is no connection.

Staffing costs

For many claims, staffing costs account for a significant proportion of the value. There has been no recent change in what can and cannot be included. As long as the payments relate to qualifying R&D, you can include: salaries, pension contributions, wages, bonuses and secondary Class 1 National Insurance contributions which the company has paid.

There are scenarios where support staff costs, or an element of them, may also be included; for instance specialist cleaners, or someone involved in recruiting people on the project. These are referred to as qualifying indirect activities.

Software

Where software is used entirely for an R&D project these licence fees can be included in your claim. And for more general software that is partly used on R&D projects you can claim a reasonable proportion.

Pure mathematics

Another new cost base, available for inclusion in an R&D tax credit claim for accounting periods starting from 1 April 2023, is pure mathematics. We are still awaiting guidance as to how these costs are attributed but can provide interpretation on a company-by-company basis.

What can’t be claimed?

There are some costs which have long been excluded from an R&D tax credit claim. These include: rent or rates, the cost of land, the costs of patents and trademarks, capital expenditure and the production and distribution of goods and services.

As highlighted earlier, there are examples where some costs have been newly excluded since 2023 or 2024.

Restrictions on R&D relief on activities performed outside the UK

For accounting periods starting after 1 April 2023 it is no longer possible to include costs for sub-contractors or externally provided workers whose work is performed beyond the UK (unless such costs are processed through UK payroll). There are two exemptions: First, if geographic, environmental or social conditions mean that the R&D cannot be undertaken in the UK; and second, if legal or regulatory requirements prohibit it.

Contributions for independent R&D

Previously, if you were a large company you could claim for contributions made for independent R&D to a qualifying body, individual or a firm whose members are all individuals. The party must have had no connection to your company. However, for accounting periods beginning on or after 1 April 2024, you can no longer include these costs in your R&D tax credit claim.

What does this mean for future claims?

As you would expect, all this will have a significant impact on future claims. Many companies will breathe a sigh of relief that no further changes were announced in the 2024 Budget.

It is also worth highlighting that the wording of the proposed changes was amended so that the RDEC merger only comes into effect once a new accounting period begins after 1 April 2024, not from 1 April 2024 itself. This means that no company will have to split a claim in one accounting period across two regimes.

We have always been proponents of robust, well-prepared claims based on proper advice and the necessary evidence. With HMRC’s stricter approach already being applied it becomes more important than ever for companies and industry partners to choose a reputable R&D tax credit adviser like Kene Partners to help prepare the claim.

How does this affect existing claims?

Existing claims for accounting periods which commenced prior to 1 April 2024 can continue subject to the rules which were applicable at the time. This may mean that it is still possible to claim under the SME scheme if you qualify by prior accounting period and it is advantageous for you to do so.

How do I claim on the new merged scheme?

Whether you are new to claiming R&D tax credits or have claimed before but want clarity on all the new rules, we can help.

We are a professional team combining tax specialists and industry experts. We can work with you to identify all your qualifying R&D activity, and correctly apply the relevant rules so that you submit an optimised claim. You can use a tool on our website to take a free eligibility assessment, or if you would rather speak to someone straight away, please book a free consultation.

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