R&D tax credit relief changes – What business owners need to know. 

Plans to significantly overhaul the current Research & Development (R&D) tax relief system were confirmed by the Government in November’s Autumn Statement.

These changes, primarily the introduction of a unified ‘research and development expenditure credit (RDEC)-like’ scheme, are set to substantially impact how businesses, especially small and medium-sized enterprises (SMEs), approach R&D tax credits.

At Grunberg & Co, we can provide assistance on any queries you may have about the changes to the R&D schemes. Contact us here for more information.

Merged R&D tax credit regime

The new scheme, applicable from 1 April 2024, merges the existing R&D tax relief frameworks into a single system. Key features include:

• Unified credit rate – A 20% credit rate matches the current RDEC regime. This standardisation simplifies the process for all companies, regardless of size. The system of relief under the merged scheme would be a taxable tax credit that is above the line and is equal to 20% of the qualifying expenditure.
• Benefits for profit and loss-making companies – Profit-making companies will see a net benefit of 15%, while loss-makers will receive a slightly higher benefit of 16.2%, calculated using the small profits rate of 19%.
• Subsidised R&D exclusions removed – The new scheme removes the need to reduce relief for subsidised R&D costs, a departure from the current SME regime. This change could increase the relief available for some companies.
• Adoption of SME’s PAYE/NIC Cap – The more generous PAYE/NIC cap of being £20,000 plus 300% of PAYE and NIC liability for the period of the claim from the SME regime will be adopted, benefiting larger entities. By contrast, the RDEC scheme limited businesses to claim just 100%of their PAYE/NIC liabilities.
• Changes in subcontracted R&D claims – The new rules will notably alter who can claim R&D tax incentives, especially for companies that subcontract a large portion of their R&D.

Subcontracted R&D rules under the merged regime

Under the merged R&D regime, all companies will be able to claim for qualifying subcontractor payments where the principal ‘intended or contemplated’ at the time the contract was entered into, that the subcontractor would be required to undertake R&D to satisfy the contract.

Subcontractors can make a claim for R&D relief in the following limited circumstances:

• Their own in-house R&D tax relief that is unrelated to a customer contract; or
• Where the customer did not “intend or contemplate” contracting out the R&D at the time of the contract (i.e. because it did not have the technical knowledge to do so) but nonetheless R&D work is needed to fulfil the contract, or
• Where the customer is an “ineligible company” (still to be fully defined but does currently replace entities previously considered “qualifying bodies”), or
• A party that is not carrying on a taxable trade in the UK, e.g. Government body or overseas customer.

Additionally, where a group company subcontracts R&D to another group company, both companies can enter an election for the company undertaking the R&D to claim the R&D relief.
Rules changes also mean that a company can claim relief for subcontracting costs, where it subcontracts its R&D to a company, which in turn subcontracts the R&D to another. This was previously disallowed.

These rules require a detailed assessment to determine the rightful claimant in each scenario.

For further guidance on these changes, Grunberg & Co are here to help. Contact us today.

Special considerations for loss-making and R&D-intensive SMEs

The Government has made an exception for loss-making R&D-intensive SMEs:

• The R&D intensity threshold is reduced from 40 to 30%.
• Eligible companies will continue to receive an 86% enhanced deduction and a repayable tax credit of 14.5%.
• A ‘year of grace’ is available for those who temporarily fall below the threshold due to exceptional circumstances.

Preparing for the changes

Businesses must start preparing for these changes now:

Review current R&D activities – Assess how the new rules will impact your existing and planned R&D activities, especially if you subcontract R&D.

Understand the financial implications – Analyse how the changes in credit rates and benefits for profit and loss-making companies will affect your financial planning.

Stay Informed – Keep an eye out for further legislative details and guidance to fully understand the nuances of the new regime. Our expert R&D team can keep you informed, contact our Tax Partner, Nimesh Patel, for more information.

The overhaul of the R&D tax relief scheme marks the end of a cycle of changes which began in 2021. While these changes promise to streamline the process, they also bring a host of considerations that could be problematic if not handled properly.

Our R&D tax relief experts can advise you on these changes plus any other questions you may have surrounding R&D tax claims. Contact us today for support.