Changes in 2024
Merger of schemes
On 31 March 2024, the R&D expenditure credit and the small or medium enterprise (SME) schemes merged for accounting periods beginning after 31 March 2024. The rate under the merged scheme is 20%, and the notional tax rate applied to loss-making businesses is the corporation tax small profit rate of 19%.
R&D-intensive SMEs
The enhanced support for R&D-intensive SMEs continues. The intensity threshold for the level of R&D expenditure required to qualify for enhanced support has reduced from 40% to 30% from 1 April 2024. For loss-making companies that meet the definition of R&D intensive, the payable tax credit rate is 14.5%.
Withdrawal of nominations
For claims made after 31 March 2024, the use of nominations for R&D tax credit payments has been removed. This means that payments must go directly to the claimant company. There will be a one-year grace period where a company’s R&D intensity falls below 30%. This will help companies in situations where expenditure fluctuates year on year.
The definition of R&D tax purposes remains unchanged and claimants will still need to prove their project seeks to achieve an advance in science of technology. See the gov.uk site.
Overseas activities
R&D tax relief is restricted to activities undertaken in the UK with only very limited scope for claiming any overseas activities. This restriction on some overseas expenditures came into effect from 1 April 2024 (postponed from 1 April 2023).
Also from April 2024, UK companies that currently claim R&D costs paid to, for example, overseas group companies or overseas third parties are no longer be able to include these costs in their claims.
HMRC scrutiny ramps up
Taxpayers should also be aware that, for the first time in several years, HMRC appears to be reviewing R&D claims thoroughly. In a number of cases, it is denying relief and seeking repayment for claims that have previously been paid out.
Be aware significant penalties can be imposed. It is, therefore, important for businesses to consider the definition of qualifying R&D expenditure carefully to ensure that what they are claiming for does genuinely qualify.
A reminder of other compliance measures
Since 1 April 2023, businesses have had to inform HMRC online that they will be making an R&D claim within six months of the end of the accounting period to which the claim relates.
Failure to notify can result in the disallowance of R&D claims. However, businesses that have claimed R&D in one of the preceding three periods do not need to pre-notify.
Companies must inform HMRC of their intention to claim R&D relief using a digital form (which was introduced on 8 August 2023), unless they have claimed R&D reliefs in the previous three years.
The digital additional information form
The digital additional information form must accompany claims made on or after 8 August 2023, in order for HMRC to process the claim and apply it to the Company Tax Return. Be aware that, if the form isn’t completed, HMRC will write confirming that it has removed the claim for research and development (R&D) tax relief from your Company Tax Return.
Information to supply in the form:
Your company’s contact details – your Unique Taxpayer Reference (UTR) which must match the one shown in your Company Tax Return, your employer PAYE reference number, your VAT registration number, and your business type – such as your current SIC (Standard Industrial Classification).
A contact for the business – this can be the main senior internal R&D contact in the company who is responsible for the R&D claim (such as a company director).
The accounting period start and end date for which you’re claiming the tax relief. This must match the one shown in your Company Tax Return.
Qualifying expenditure details – For each project detailed in the form, you need to declare the amount of qualifying expenditure allocated to that project. You also have to demonstrate you meet the conditions for either or both of:
- Tax relief as a small and medium-sized enterprise (SME) or
- Expenditure credit as a large company or SME
You can find an overview of the qualifying expenditure (including an explanation of qualifying direct and indirect activities) for the form on the Gov.uk website or do contact one of our team for more information.
The project(s) details – This is the number of all the projects that you’re claiming for in the accounting period and their details. Note though, if you’re claiming for these volumes of projects, you need to include the following level of information:
- 1 to 3 projects: describe all the projects you’re claiming for that cover 100% of the qualifying expenditure.
- 4 to 10 projects: describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described.
- 11 to 100 (or more) projects: describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described — if the qualifying expenditure is split across multiple smaller projects, describe the 10 with the most qualifying expenditure.
Again, the Gov.uk site provides guidance on what the project descriptions should include. Alternatively, you can contact our team for help.
Externally provided workers
Since 1 April 2023, payments to externally provided workers to carry out R&D only qualify for relief to the extent that those workers’ earnings are taxed through the pay-as-you-earn (PAYE) system.
Cloud and data expenditure
Since 1 April 2023, spending related to cloud computing and data can be included in R&D tax relief claims. This change has been particularly beneficial for businesses in the tech and media sectors.
For example, businesses that pay licence fees to rent cloud computer space or pay for data in the context of R&D are able to incorporate these costs into their claims.
Cash refund cap
It is also worth remembering that the amount of R&D tax relief credit that an SME can receive has been capped since 2021 at £20,000 plus 300%
of its total PAYE and National Insurance Contributions (NIC) liability for the period.
However, a business is exempt from the cap if:
- its employees are creating, preparing to create or managing intellectual property
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of
externally provided workers by, connected persons.
This does not affect the 130% relief on qualifying annual R&D costs, just the amount which you can surrender for cash. So, if the cash refund is restricted, you can still carry forward the rest to claim as part of a trading loss in future years.
Can we help?
If you would like to know more about how we can help with applications and compliance regarding R&D tax relief, please speak with your Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2024
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