The R&D tax relief scheme is changing in April – what to do you need to know?

The new R&D tax relief scheme in April will combine the Research and Development Expenditure Credit (RDEC) and the R&D SME scheme, both which offer incentives to businesses.

If you are a larger business, you can currently claim an expenditure credit to offset your Corporation Tax bill for working on R&D projects (under the RDEC scheme).

Whilst, under the R&D SME scheme, your business can deduct an additional 86 per cent of your qualifying costs from your yearly profit, as well as the normal 100 per cent deduction – this makes a fantastic combined total of a 186 per cent deduction.

Although the new scheme includes incentives, the changes to the scheme mean you must know its ins and outs (and how it will benefit you) by April 2024.

Incentives from these schemes can help to significantly reduce your Corporation Tax liabilities and range from support that covers the costs of research & development to relief on losses your business might make during a project.

You can get R&D tax relief if you spend money developing or enhancing:

• Products
• Processes
• Services

HMRC previously revealed the UK claimed a significant £204 billion in total relief for the 2022/23 tax year, so it’s crucial you claim what you can.

But what do you need to know?

How has the R&D tax relief scheme changed?

The new scheme will mean your SME receives a lower benefit due to the Government’s goal to ‘rebalance’ the different rates available, which will address wastage and enhance profitable R&D activity.

From 1 April 2024, your SME will be considered R&D intensive if your qualifying R&D spending makes up at least 30 per cent of their total expenditure during their financial year.

If you are an R&D-intensive SME, however, you can still claim a tax credit at a higher rate of 14.5 per cent.

RDEC explained

The RDEC structure has been chosen for the new R&D scheme so, if you are a RDEC claimant, you need to understand the changes to avoid disruption.

To increasing the overall level of R&D investment, the cost of investing R&D will be reduced – therefore, only the R&D decision maker, in the process, will be awarded the relief.

The reformed policy allows your business to outsource your R&D activities to claim tax relief for any costs associated with these actions.

Businesses that conduct R&D activities on behalf of a larger business can usually claim under RDEC.

However, now you will not be considered the R&D decision maker and will not be able to make a claim if your contractor can.

Only the large business contractor should receive a boost to the value of their claim.

You now have a responsibility to understand the complexities that surround its framework, and our team of experts can help you do this.

How will I be affected as an R&D intensive SME?

Despite the introduction of a merged R&D scheme from 1 April, there will also be two separate incentive schemes put in place.

The continuation of the enhanced rate for R&D-intensive SMEs operating under the current SME model will also be carried out.

The R&D-intensive scheme will only apply to you if you are a loss making SME that has spent a set proportion of your total business expenditure on R&D.

The Autumn Statement 2023 announced the qualifying threshold would be reduced from 40 per cent to 30 per cent (of a business’s total expenditure).

This new legislation now enables more loss making SMEs to qualify as R&D-intensive and grants you access to extra financial relief that will benefit your growth and development.

Although the 10 per cent threshold decrease is beneficial, it does mean that if you are a business that has invested a quarter of your overall expenditure into R&D then you will not be considered R&D-intensive.

Our team can help you get to grips with these changes and how they impact your business.

Contact us for advice on the R&D tax relief scheme and related matters.