The R&D tax credit scheme has basically been overhauled. How the programme will be administered in the future will be quite different from what accounting firms and claimants experienced since the programme’s inception.
We have highlighted the main changes to the programme. There are other changes, and we will be reviewing those in subsequent newsletters.
While RDP predicted it, the R&D tax credit claims submitted in error under the programme has ballooned. HMRC reported to the House of Commons in the fall of 2023 that they estimated 50% of all R&D tax credit claims were in error.
As a result, HMRC has hired over 300 new inspectors and will continue to increase compliance checks. Many companies are surprised to learn that HMRC does not check all R&D tax credit claims. We estimate that in prior years HMRC only checked less than 5% of all R&D tax credit claims submitted.
Compliance checks are very onerous, and companies typically face an uphill battle. RDP provides professional support for companies throughout a compliance check. In fact a number of law and accounting firms use our expertise to help defend their clients in R&D tax credit disputes with HMRC. Even where other R&D tax credit service providers have been used.
To better control and standardise the information contained in R&D tax credit submissions, companies must now submit Additional Information regarding the R&D project(s) carried out. Part of this Additional Information is describing how the R&D project meets eligibility criteria. This is the most important aspect of the R&D tax credit claim.
Companies filing an R&D tax credit claim for the first time (or companies who have not filed an R&D tax credit claim in over 3 years) will also have to file a notification with HMRC of their intention to file, along with information on the proposed R&D tax credit claim itself. This must be done within 6 months of year-end.
For information related to Additional Information requirements, and how RDP can assist please contact us.
R&D Tax Credit Rate Changes and New R&D Tax Credit Scheme
For SMEs, the R&D tax credit rates have changed (see table below). Overall, the rates have been reduced for the SME scheme but have increased for companies claiming under the RDEC scheme.
The SME scheme will be merged with the RDEC scheme with the result that the R&D tax credit rate will be 20% of eligible R&D costs. This will become effective for years commencing after 1 April 2024.
For R&D-intensive SME’s a separate programme will apply. For years commencing after 1 April 2024, an R&D-intensive SME is for those whose R&D spend is greater than 30% of its total spend in a year. The rates for this category of SME is below.
Foreign contract fees and EPW costs will be ineligible for years commencing after 1 April 2024.
Subsidised expenditure and contract fees
Once the merged scheme is in effect, the subsidised expenditure rule will no longer be in place. Therefore, grants received in respect of an R&D project will not reduce or impact in any of the costs that can be claimed on an eligible R&D project.
HMRC will introduce tiebreaker rules where one UK company engages another UK company to undertake R&D.
In order to prevent more than one UK company from claiming R&D tax credits where work is contracted between companies. There will be rules to govern which of the companies is eligible to claim the costs. Essentially, the company that makes the decision to carry out R&D and who bears the risk will be eligible to claim the related R&D project and costs. This can be a tricky and “grey” area. RDP has considerable experience with this rule, so don’t hesitate to contact us if you have any questions.
* The R&D tax credits earned are subject to tax. The post-tax RDEC/Merged scheme rates from 1 April 2023 will vary. Which will depend on the level of the taxable profits a company has. Plus the corporation tax rate applied to those profits. The Net RDEC tax benefit is 15% (after reducing the 20% R&D tax credit by the main rate of CT of 25%). For SMEs, the net tax benefit is 16.2% (after applying the deemed corporate tax of 19%) and for companies paying tax in the marginal rate band, the net benefit is 14.7% (after applying the corporate tax rate of 26.5%).
**The loss-making R&D-intensive companies are those whose qualifying R&D expenditure is at least 40% (from 1 April 2023) or 30% (from 1 April 2024) of the total expenditure (splitting accounting periods, as required). The Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account subject to some adjustments. When the final law is passed, we will comment further on this.
RDP Associates have highlighted the main changes to the 2024 R&D Tax Credit Scheme. Contact our team at RDP today to discuss further on 0208 214 1341 or email Jenni at [email protected].