From April 1 2024, research and development (R&D) tax credit changes have been introduced in the UK – here’s what you need to know about these new R&D tax rules, which are designed to improve the system.
How are the R&D tax credit schemes changing?
In the 2023 Autumn Statement. the government announced reforms to R&D tax credit relief that were intended to simplify matters, with the SME scheme and RDEC scheme being merged – applicable to accounting periods beginning on or after April 1 2024.
The exception to the new merged scheme is for loss-making SMEs that are categorised as being R&D intensive – which means more than 30% of their total expenditure is incurred on research and development. That 30% figure has been reduced from the previous 40% which applied up to March 31 2024.
SMEs which cross that 30% threshold in terms of their expenditure on research and development will qualify for a new SME intensive scheme under the new R&D tax credit legislation.
An R&D tax credit rate of 20% will apply to the merged scheme, while loss-making R&D intensive SMEs will receive a 27% tax credit. Use our R&D tax credit calculator to work out what this will mean for you.
Although the merged scheme and the SME intensive scheme came into effect from April 1 2024, the SME and RDEC schemes will not become obsolete immediately.
This is because companies can submit claims retrospectively for the two previous accounting periods, as well as the latest one. For example, a company whose accounting period ends on March 31 would need to submit its R&D tax credit claim for the accounting period April 1 2021 to March 31 2022 before midnight on March 31 2024.
What can be claimed under the new R&D tax credit rules?
- Overcoming technical challenges
- Creating and testing prototypes
- Streamlining processes
- Trialling new (or substituting) materials
- Developing bespoke software
- Trial and error
- Industry firsts
What will be the new tax relief rates following the R&D scheme changes?
An R&D tax credit rate of 20% will apply to the merged scheme, while loss-making R&D intensive SMEs will receive a 27% tax credit. Use our R&D tax credit calculator to work out what this will mean for you.
Why are the R&D tax incentive changes being introduced?
With the government having set a target of raising investment in R&D to 2.4% of GDP by 2027, the more favourable rates will reduce the cost of innovation and encourage companies to spend more on research and development.
Also, the simplification and streamlining of the rules should reduce errors within the claims process – although anyone less than 100% sure of how to submit their claim is advised to consult an expert such as randd.
What are the different R&D tax credit schemes?
For accounting periods that began before April 1st 2024:
RDEC scheme
This is for large companies, defined as having more than 500 staff and generating turnover of more than 100million euros (£85million) or which have a balance sheet total of over 86 million euros (£73million).
If an SME has been subcontracted to conduct research and development work, it will need to claim tax relief through the RDEC scheme.
SME scheme
This is for companies which have less than 500 employees and a turnover of under 100 million euros or a balance sheet total under 86 million euros (£73million).
Linked and partner enterprises will be included in this total and can affect a company’s SME status. An R&D-intensive SME – which incurs at least 40% of its total expenditure on R&D – can claim a higher rate of relief under the new R&D tax rules.
For accounting periods that began on or after April 1 2024:
Merged scheme
This is an amalgamation of the two above schemes and has an R&D tax credit rate of 20%, the same as for the discontinued RDEC scheme.
The merged scheme was introduced under the new R&D tax credit rules in 2024 to simplify and improve the system, and help to drive innovation in the UK, by adopting a single set of qualifying rules for most R&D businesses.
SME intensive scheme
This applies to loss-making SMEs for which 30% or more of their total expenditure is on qualifying R&D activities and has an R&D tax credit rate of 27%.
To be eligible for this scheme, a company must have fewer than 500 staff and either a turnover of under 100 million euros or under 86 million euros gross assets.
What happens if my accounting period falls in the changeover period?
Note that although the merged scheme came into force on April 1 2024, it does not apply to expenditure incurred from that date if your company’s existing accounting period ends later.
For example, a company whose accounting period runs from January 1 to December 31 will enter the merged scheme for the first time when submitting an R&D tax credit claim for its accounting period ending December 31 2025, whereas one whose accounting period runs from April 1 to March 31 will enter the merged scheme with immediate effect.
There is no need for companies to claim under two different schemes if their accounting period straddles April 1 2024. They will simply switch to the merged scheme when their next accounting period begins.
How to make a successful claim following the R&D tax credit changes
We appreciate that changes to the R&D tax credit scheme can be unsettling even for business owners who are fully conversant with the process of submitting a claim – and we are available to help.
After utilising our R&D tax credits calculator to gain an indicative idea of what your claim might be worth, you can contact our team of experts for advice on the next steps towards maximising your potential benefit.
All the information you need to begin a conversation with us can be found here – we will be happy to help you.