Prior to the 2023 Autumn Statement, it was clear to us all that R&D tax was becoming very complex, and high levels of non-compliance was resulting – with a significant compliance gap between the two main schemes.
The resulting action taken by HM Revenue & Customs (HMRC) and the Chancellor, you will remember, saw the merging of two R&D tax relief schemes – the R&D Expenditure Credit (RDEC) and the SME relief scheme.
This came into effect for accounting periods on or after 1 April 2024 and has brought the majority of R&D tax relief claimants into the scope of one scheme.
On the face of it, this is a more straightforward system than the previous one and provides a reduced level of risk for your clients when submitting claims.
But is this the whole story?
There are plenty of nuances and misconceptions surrounding the new merged R&D tax relief scheme that may affect your clients and whether they want to claim – let’s take a look at some of them now.
The company doing the work can always claim the R&D tax credit.
Not always. The Government’s aim is to incentivise investment in R&D, which, in practice, means reducing the financial burden of such investment on the part of the company that funds it.
Under the merged scheme, it is the company which decides R&D needs to take place which makes the claim.
In many cases, this is the ‘customer’ where R&D is done on their behalf by a ‘contractor’ – it should be made clear in this case the customer intends for the contractor to conduct R&D or else there should be a reasonable assumption that R&D might need to take place.
If this is not made clear, the contractor company may claim instead if they have decided that R&D needs to happen in order to complete the terms of the contract.
There is no additional support for SMEs.
While it is true that the previous SME tax relief scheme is now part of the R&D tax relief scheme, loss-making SMEs can still access enhanced relief through the R&D intensive SME relief.
SMEs, for this purpose, are defined as having fewer than 500 staff, a turnover of 100 million Euros or a balance sheet of 86 million Euros.
Those which meet this definition may be classed as R&D intensive if 30 per cent or more of their expenditure goes towards R&D. In this case, loss-making SMEs can claim an 86 per cent expenditure enhancement and a 14.5 per cent payable credit.
Additionally, businesses which move in and out of this category will be offered a one-year grace period to ensure that they are not negatively impacted by financial fluctuations.
Make sure that your clients are aware of this support, particularly if they operate loss-making projects as this can put businesses off approaching their accountant or financial adviser about R&D tax relief in the first place.
R&D expenditure credit is non-taxable.
Due to its complexity, clients may be unaware that the merged scheme operates similarly to the RDEC under the previous system.
When they claim under the merged scheme, the credit is deemed to be trading income and is therefore liable for Corporation Tax.
For this reason, while the main headline rate is 20 per cent of qualifying expenditure, clients claiming under the scheme will receive a net benefit of up to 16.2 per cent – so you will need to work with them to plan their cash flow carefully.
Under the merged scheme, R&D tax relief remains highly complex and, in order to deliver the best service to your clients, we always recommend partnering with a specialist firm to create and submit claims.
Contact randd uk today for support with your clients’ R&D tax claims – We’re here to help.
