After a decade of little change, the tax regime for research and development in the UK has undergone a ‘credit style’ revamp, writes Liam McHenry
New research and development (R&D) rules for businesses in the UK with an accounting period beginning on or after 1 April 2024 have commenced. These entities are within the remit of the newly merged, research and development expenditure credit (REDC) expenditure scheme – with the exception of “highly R&D-intensive companies”.
Companies with over 30 percent of their yearly expenditure qualifying for R&D tax relief can still claim under a restricted version of the SME scheme. Given this high bar, however, it is likely that only small technology start-ups will qualify.
For everyone else, the new rate will provide a benefit worth about 15p per £1 of qualifying expenditure, so not all is lost for those exiting the SME scheme, as a generous tax incentive remains for potential claimants.
Reduced complexity?
The stated aim of the merged scheme is to reduce complexity for claimants and their advisors. With two schemes remaining post-merger, however, the new scheme is actually more complex than its predecessor.
Subcontracted expenditure had previously been excluded under the RDEC scheme in any meaningful way.
Under the new merged scheme, a new system has been put in place with the aim of rewarding whichever party decides to undertake the R&D activity.
This adds a new dimension to determining the eligibility of qualifying R&D expenditure insofar as a subcontractor will now need to determine whether they believe their customer knew in advance that a project would require R&D activity.
The theory is that this approach will remove the potential for both parties to claim on the same project, but it is easy to see how ambiguity might arise.
When agreeing the terms of contracts with customers, claimants must pay additional attention to any clauses relating to intellectual property (IP) generation and whether they indicate that R&D will be required.
Taking care at this stage could help claimants identify and preserve their right to claim the corresponding tax relief.
Overseas expenditure
A restriction on overseas expenditure was also introduced on 1 April 2024. Unless there is a compelling reason why the expenditure could not reasonably have been incurred in the UK, it will not be eligible for inclusion in the claim.
However, recognising the unique position of Northern Ireland and its significant integration with the neighbouring Republic of Ireland, claimants can bypass this new restriction. By doing so, they could gain up to a maximum additional benefit of £250,000 every three years.
This may require some additional administration, but it is still a welcome reprieve from the restriction, which would have been costly.
Increased scrutiny
This article offers a summary of the main rule changes coming into effect this month. In reality, there are more of which claimants should be aware.
His Majesty's Revenue & Customs (HMRC) has dramatically increased its compliance efforts, with recent revelations from the Public Affairs Committee indicating that upwards of 20 percent of new R&D claims are now under scrutiny.
While this fact alone should not be a major concern, it is worth noting that this increased scrutiny often comes with an aggressive stance, beginning with the assumption that R&D claims should be disallowed.
The experience of one claimant to another can dramatically vary depending on which caseworker is allocated to the enquiry.
Regardless, opening an enquiry can be a prolonged process before a conclusion can be reached.
In the event of an unsuccessful enquiry defence, HMRC will be obligated to consider whether any penalties should be levied, depending on whether they determine that the claim was prepared carelessly.
In addition, depending on the level of disclosure provided in previous claims made in recent years, HMRC can (and is actively encouraged to) look into these previous claims beyond the normal enquiry window.
Planning ahead
The implementation of the new R&D tax rules marks a significant shift for businesses heavily reliant on R&D activities for growth and innovation. As businesses adapt to the new regime, strategic planning and collaboration with tax advisors will be essential in maximising the benefits.
Liam McHenry is Director of Tax at Grant Thornton
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