2024 R&D Tax Reforms – Your Questions Answered

Senior R&D Tax Consultant Lewis Songaila answers questions posed during our webinar on the April 2024 R&D Tax reforms.

My colleague Greg Ludvickson and I recently hosted a webinar about the R&D Tax Relief reforms announced during the 2023 Autumn Statement

The reforms, which most notably include the merging of SME R&D Tax Relief and RDECare some of the most significant in the scheme’s history and will greatly impact the way many companies claim relief. 

In the webinar, I explained what changes the government is making, how the new merged scheme would work, and what the changes mean for the amount of funding available for qualifying businesses. 

Watch the full recording here.

We fielded a range of important questions during the Q&A. I have listed the questions and answers I gave below. Hopefully they will give you some clarity about what the changes mean for your business. 

If you still have questions about the 2024 reforms or any other aspect of R&D Tax Relief, don’t hesitate to get in touch. My colleagues and I in GrantTree’s R&D Tax team would be happy to help.

Q&A

Why is the government merging the two schemes?

The government says it’s merging the SME and RDEC schemes to make the process of claiming R&D Tax Relief simpler. The idea is that most companies will only need to navigate the eligibility criteria, qualifying costs, and application procedures of one scheme, rather than two, which should allow them to develop a more complete understanding of what projects and costs are eligible, improving compliance.

Simplification is a noble aim, of course. Yet, like any significant change, I believe these reforms will make things more complicated for businesses, at least in the short term. The process of learning how to apply for R&D Tax Relief under the new scheme is bound to require considerable time and energy. With the merged scheme based largely on RDEC, businesses that only have experience with the SME scheme will face an especially steep learning curve. Companies’ lack of experience with this new scheme means they are more likely to make mistakes, increasing their chances of facing an HMRC enquiry

It’s also possible the government is merging the schemes to reduce the cost of non-compliant claims. The merger stands to save the government £280 million. In the 2022 Autumn statement, the Chancellor explained he was cutting relief for SMEs because of “worrying reports” of abuse. The merger could be part of that same effort.

Do you think the government will make any more changes to R&D Tax Relief in the near future?

In the Autumn Statement, the government said it was not planning to make any other major changes to R&D Tax Relief anytime soon. Should we believe them? I’ll let you make your own mind up. 

We do know HMRC is working on an action plan to improve compliance, which may lead to changes in how the agency policies and processes claims. For instance, HMRC may tweak the additional information form, requiring companies to share even more information about their development work to access relief. 

We also know that there will be an election this year that, if opinion polls are to be believed, will usher a new party into power. Labour has said very little about its attitude towards R&D Tax Relief, so we’ll have to wait for its manifesto to know what a Kier Starmer premiership would mean for this important scheme.

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Can an R&D-intensive company that is breaking even claim through the merged scheme instead?

Yes, they can. All companies that qualify for R&D Tax Relief will be able to claim through the merged scheme, while only companies that spend at least 30% of their total expenditure on qualifying costs will be able to claim under the R&D-intensive regime.

Currently, only companies that spend more than 40% of their total outgoings on qualifying R&D costs qualify for the R&D-intensive scheme. However, the government is lowering this threshold to make the scheme more accessible to loss-making SMEs.

The R&D-intensive regime was designed to provide more relief to unprofitable companies that have invested heavily in research and development. Yet, strangely, the R&D-intensive scheme offers companies that have broken even 30% less relief than the merged scheme (16.2% vs. 12.47%). As a result, companies that have broken even may wish to apply for R&D Tax Relief through the merged scheme instead.

Will grant funding still affect my ability to claim under either of the schemes?

Yes it will. 

If you have funded your R&D project with a grant, you will need to claim R&D Tax Relief for those projects under the merged scheme, even if you qualify as R&D-intensive. 

This is effectively a continuation of current rules, which say grant-winners must claim R&D Tax Relief for their projects under RDEC, even if they qualify for the more generous SME scheme. 

Read more: Grants and R&D Tax Credits: Can I Claim Both?

Does merging of the two schemes simplify things for companies that have won grant funding?

No, it doesn’t. 

As mentioned above, companies that have won a grant will need to claim under the new merged scheme instead of – if they qualify for it – the more generous R&D-intensive scheme. 

This mirrors current arrangements, where grant winners that qualify for the more generous SME R&D Tax Relief scheme must claim for grant funded projects under RDEC instead. 

There is some good news for unprofitable grant winners, though. They will receive more relief (16.2%) from the merged scheme than the RDEC scheme (15%) because of the merged scheme’s lower notional tax rate: (19% instead of RDEC’s 25%). 

Read more: Grants and R&D Tax Credits: Can I Claim Both?

What’s happening with HMRC’s compliance crackdown?

The crackdown is getting tougher. 

The agency is increasing the number of enquiries and has recently introduced new measures to tackle non-compliance, including the removal of claims from the tax returns of companies it deems are “clearly ineligible” for relief. These measures have drawn sharp criticism from the Chartered Institute of Taxation (CIOT), which accused the agency of “an abuse of power”.

HMRC is also working on an action plan to improve compliance. This will likely lead to the agency implementing new tactics that increase the chances of businesses facing a time-consuming enquiry and losing some or all of their funding. 

GrantTree will be reporting on this action plan once it’s published. To stay up to date, make sure you sign up for GrantTree’s newsletter.

Given these changes, is HMRC likely to view FY23 claims in an easier light?

It’s highly unlikely. 

Companies are already having to navigate a range of changes, including new relief rates and the introduction of the additional information form, requiring companies to submit detailed financial and technical data about their development work. 

Rather than cutting businesses some slack – as the question suggests – HMRC is increasing the number of enquiries and, as mentioned above, devising new tactics to improve compliance. 

Have HMRC’s processing times for R&D Tax claims increased?

We have noticed a slight increase in processing times.

This is likely due to two things.

First, HMRC is a lot busier this time of year. Though it will be busier still in April.

Second, R&D claim inspectors now have to review all the information contained on each company’s additional information form. 

This extra information helps tax inspectors identify ineligible costs and projects. However, it also means inspectors must review more data when processing R&D Tax claims, slowing the process down. 

Read more: How Long Before I Receive My Tax Credits?

Questions about the R&D Tax reforms?

This is a period of extraordinary change for R&D Tax Relief, with the government introducing new claim requirements, new relief rates, and now, a brand new scheme. 

Many companies are finding it impossible to keep up, and to manage nagging uncertainities about what these reforms mean for their access to R&D Tax Relief, a vital source of funding for innovative businesses. 

If you want to know how the recent changes will impact your business and what you can do to stay compliant, GrantTree is here to help.

With 13 years of experience and over £350 million secured for our clients, my fellow R&D Tax specialists and I perfectly placed to help you understand these reforms, what they mean for your particular situation, and how they’re likely to impact your funding moving forward. 

Just get in touch – and one of our team will be right with you.