A series of major R&D Tax reforms will impact your company this year, affecting your funding, which costs you can claim for, and, potentially, your eligibility for relief. Here’s what you need to know.
First, the good news: there are no more changes to R&D Tax Relief on the horizon. Phew!
Now, onto more disruptive developments. The major changes that took effect last year apply to accounting periods (APs) starting on or after 1 April 2024. Since the vast majority of APs are 12 months long, most claimants will have to navigate these changes for the first time this year.
If you’re planning to claim R&D Tax Relief in 2025, you need to be aware of these changes, especially if your accounting period ends after 30 March. If you’re not across these reforms, your claim will almost certainly be non-compliant. This will put you at high risk of an HMRC enquiry, delaying your funding and distracting your team.
In this blog, I’ll explain each of the changes you need to know about and how they’ll affect your business, starting with the biggest change of all: the launch of the merged scheme.
If you need any help complying with the updated regulations, my colleagues and I in GrantTree’s R&D Tax Relief team are here to help! Just drop us a line.
Summary of the changes
- Most companies will have to claim under the new merged scheme
- The threshold for the more generous ERIS scheme has been lowered
- There are new rules on claiming relief on contracted R&D
- Most payments to overseas subcontractors and externally provided workers are no longer eligible for relief
- Restrictions on claiming relief on subsidised projects have been lifted
Most companies will have to claim under the new merged scheme
The government has launched the new RDEC scheme, aka merged scheme, so called because it unites the old RDEC and SME R&D Tax Relief regimes.
Impacting APs starting on or after 1 April 2024, the merged scheme offers an above-the-line credit worth between 15p and 16.2p per £1 of qualifying expenditure. It is largely based on the old RDEC scheme but includes selected elements of the SME scheme, making it more generous.
We explore the impact this change will have on different companies in this detailed guide to the new regime. But, as a quick summary:
- The process of claiming relief under the merged scheme is largely the same as the RDEC scheme
- Companies used to claiming under the old SME scheme will have to learn a whole new process
- SMEs will receive less relief under the merged scheme
- However, SMEs that are unprofitable and R&D-intensive will be able to claim 67% more relief under the enhanced R&D intensive support (ERIS) scheme
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A lower threshold for R&D intensity
To claim under ERIS, you need to be:
- A small or medium enterprise (SME)
- Unprofitable
- R&D-intensive
To be R&D intensive, you need to invest a certain percentage of your company’s total expenditure on qualifying R&D costs, like wages and raw materials. This is the ‘intensity threshold’.
The threshold is:
- 40% for expenditure incurred on or after 1 April 2023
- 30% for accounting periods starting on or after 1 April 2024
The government says that lowering this threshold from 40% to 30% will allow 5,000 more SMEs to access the ERIS scheme.
When working out whether you’re eligible for ERIS, make sure you have included all of your qualifying expenditure, including costs tied to indirect activities. If you overlook costs, you may claim for much less relief than you’re entitled to.
New rules for claiming R&D Tax Relief on subcontracted R&D
The government has overhauled the rules around R&D Tax Relief on work that’s been subcontracted to other businesses.
Now, the customer is eligible for relief if the development work qualifies as ‘contracted out R&D’. To do this, it must pass three tests:
- Test 1: There must be a contract between the two parties
- Test 2: The contractor must undertake qualifying R&D
- Test 3: The customer ‘contemplated or intended’ the need for R&D
The third test uses fairly ambiguous verbiage, creating lots of room for grey area. You can find a more complete breakdown of step 3 in our detailed blog about these new regulations.
This new ‘contracted out test’ means that, in most cases, the customer will be able to claim relief, not the contractor.
However, the contractor will be able to claim relief if three conditions are satisfied:
- The contractor was hired to perform R&D
- The customer is ineligible for R&D Tax Relief, e.g. because they’re not liable for corporation tax
- The contractor incurred qualifying expenditure
The government has also done away with rules preventing large companies from claiming relief on work contracted to other UK businesses.
Restrictions on overseas subcontractors and EPWs
Most payments to subcontractors and EPWs based abroad are no longer eligible for R&D Tax Relief.
- Subcontractors – If the R&D took place outside the UK, you won’t be able to claim relief on the overseas subcontractors that delivered the work.
- EPWs – You can only claim relief on EPWs that are liable for PAYE and NIC
However, you can claim relief on these costs if the conditions you need to perform your R&D aren’t available in the UK, and it would be unreasonable for you to recreate them.
The conditions can be physical-geographical, social or economical – or regulatory, pertaining to local laws and approval processes.
Costs for subcontractors and EPWs based abroad that qualify for relief are called Qualifying Overseas Expenditures (QOEs).
Restrictions on claiming relief on subsidised projects have been lifted
Previously, SMEs could only claim relief on projects that had been subsidised under the old RDEC scheme rather than the more generous SME scheme.
This meant that grant winners lost out on large amounts of tax relief.
The government has removed these restrictions for accounting periods starting on or after 1 April 2024. This means how you funded your project won’t affect how much relief you can claim for it.
This change is most meaningful for unprofitable, R&D-intensive SMEs claiming for subsidised projects. They will be able to claim relief on those projects under the ERIS scheme instead than the new RDEC scheme, meaning they’ll receive 67% more relief.
Let GrantTree’s experts save you from the turmoil
As you can see, if you’re planning to claim R&D Tax Relief this year, you’re going to have to contend with a huge amount of change.
That’s on top of the regulations that have already taken effect, like the introduction of the additional information form and the claim notification requirement.
These changes are making it extremely difficult to remain compliant – to claim the right amount of relief for the right projects in the right way. In this age of increased HMRC scrutiny, even tiny, accidental deviations from the rules can land you in a long, time-squandering enquiry.
If you want to claim compliantly and avoid an investigation, you need help from an experienced and credible R&D Tax partner like GrantTree. Our experts will make sure your claim is structured correctly, reflecting all the latest regulations, and that you are claiming for all your eligible expenditure, and not a penny more.
For help navigating these changes, just get in touch.
