Changes from 31 March 2024
In his 2023 Autumn Statement, Chancellor Jeremy Hunt, announced significant changes to the tax relief regime for small and medium-sized enterprises (SMEs).
The R&D expenditure credit and the small or medium enterprise (SME) schemes will be merged for accounting periods beginning after 31 March 2024. The rate under the merged scheme will be 20%, and the notional tax rate applied to loss-makers will be the corporation tax small profit rate of 19%.
The enhanced support for R&D-intensive SMEs will continue. The intensity threshold for the level of R&D expenditure required to qualify for enhanced support will be reduced from 40% to 30% from 1 April 2024. For loss-making companies that meet the definition of R&D intensive, the payable tax credit rate will be 14.5%.
For claims made after 31 March 2024, the use of nominations for R&D tax credit payments will be removed, meaning that payments must go directly to the claimant company. There will be a one-year grace period where a company’s R&D intensity falls below 30%. This will help companies in situations where expenditure fluctuates year on year.
Current compliance
For now, and since 1 April 2023, businesses have had to inform HMRC online that they will be making an R&D claim within six months of the end of the accounting period to which the claim relates.
Failure to notify can lead to disallowance of the R&D claims. However, businesses that have claimed R&D in one of the preceding three periods do not need to pre-notify.
Companies have to inform HMRC of their intention to make a claim for R&D relief using a digital form which was introduced on 8 August 2023, unless they have claimed R&D reliefs in the previous three years.
The digital additional information form
The digital additional information form has to accompany claims made on or after 8 August 2023, in order for HMRC to process the claim and apply it to the Company Tax Return. Be aware that HMRC has warned that, if the form isn’t completed, it will write confirming that it has removed the claim for research and development (R&D) tax relief from your Company Tax Return.
Information to supply in the form:
Your company’s contact details – your Unique Taxpayer Reference (UTR) which must match the one shown in your Company Tax Return, your employer PAYE reference number, your VAT registration number, and your business type – such as your current SIC (Standard Industrial Classification).
A contact for the business – this can be the main senior internal R&D contact in the company who is responsible for the R&D claim (such as a company director), or an agent involved in the R&D claim.
The accounting period start and end date for which you’re claiming the tax relief. This must match the one shown in your Company Tax Return.
Qualifying expenditure details – You also have to include details of the qualifying expenditure for your claim and demonstrate you meet the conditions for either or both of:
- Tax relief as a small and medium-sized enterprise (SME) or
- Expenditure credit as a large company or SME
You can find an overview of the qualifying expenditure (including an explanation of qualifying direct and indirect activities) for the form on the Gov.uk website or do contact one of our team for more information.
The project(s) details – This is the number of all the projects that you’re claiming for in the accounting period and their details. Note though, if you’re claiming for these volumes of projects, you need to include the following level of information:
- 1 to 3 projects: describe all the projects you’re claiming for that cover 100% of the qualifying expenditure.
- 4 to 10 projects: describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described.
- 11 to 100 (or more) projects: describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described — if the qualifying expenditure is split across multiple smaller projects, describe the 10 with the most qualifying expenditure.
Again, the Gov.uk site gives guidance on what the project descriptions need to include. Alternatively, contact our team for help.
Overseas activities
R&D tax relief is restricted to activities undertaken in the UK with only very limited scope for claiming any overseas activities. This restriction on some overseas expenditures will now come into effect from 1 April 2024 instead of 1 April 2023 (as previously announced).
Also from April 2024, UK companies that currently claim R&D costs paid to, for example, overseas group companies or overseas third parties may no longer be able to include these costs in their claims.
Externally provided workers
Since 1 April 2023, payments to externally provided workers to carry out R&D only qualify for relief to the extent that those workers’ earnings are taxed through the pay as you earn (PAYE) system.
Cloud and data expenditure
Spending related to cloud computing and data can be included in R&D tax relief claims from 1 April 2023 – a change that was particularly beneficial for businesses working in the tech and media sectors.
For example, businesses that pay licence fees to rent cloud computer space or pay for data in the context of R&D will be able to incorporate these costs into their claims.
Cash refund cap
It is also worth remembering that the cash refund cap is now in effect for accounting periods beginning on or after 1 April 2021.
Since 1 April 2021 the amount of research and development tax relief credit that a business can receive has been capped at £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NIC) liability for the period.
However, a business is exempt from the cap if:
- its employees are creating, preparing to create or managing intellectual property
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons.
This change does not affect the 130% relief on qualifying annual R&D costs, just the amount which you can surrender for cash. So, if the cash refund is restricted, you can still carry forward the rest to claim as part of trading loss in future years.
Credit rate changes
For R&D expenditure after 31 March 2023:
- the R&D expenditure credit rate increased from 13% to 20%;
- the small and medium-sized enterprises (SME) additional deduction decreased from 130% to 86%; and
- the SME credit rate decreased from 14.5% to 10%.
Loss-making companies
From 1 April 2023, a new credit rate was introduced to loss-making companies whose R&D expenditure constitutes at least 40% of their total expenditure. Qualifying companies can currently claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% rate under the existing R&D small and medium-sized enterprise (SME) scheme. Note, however, our earlier point about the SME scheme changing in late March 2024.
Can we help?
If you would like to know more about how we can help with applications and compliance regarding R&D tax relief, please speak with your Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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Related Resources
The Chancellor’s 2023 Autumn Statement
