Grant Snedden

Last year’s Autumn budget gave the green light to a brand-new merged R&D tax relief scheme, a shake-up which marks a significant departure from the current setup, where separate R&D schemes for SMEs and large businesses have been the norm.

After consultation, HMRC has introduced the new measures which come into force next month with the aim of reducing fraud and error and boosting innovation. Although it means businesses will navigate a more streamlined process and single set of qualifying rules, the rewards, in the form of tax credits, will be significantly lower.

Until now, there has been a scheme for SMEs and a scheme for large companies. From April onwards there will be a merged scheme with lower rates of tax relief for SMEs.

The tax benefit for a loss-making SME under the old rules would be 33.4% which means if a business incurred £100,000 qualifying expenditure on innovation activities, the tax benefit would be £33,400. From 1 April, under the merged scheme, the amount businesses can claim in tax relief for qualifying research and development expenditure will drop to between 14.7% and 16.2%, almost halving the benefit.

Businesses will have to consider the implications of the new merged scheme, and if they can qualify to claim under the new R&D intensive scheme where the benefit will be around 27%. It is still less than the 33.4% available under the old rules, but not as bad as dropping to 16.2%.

To qualify as R&D intensive from April 2024, a company must demonstrate over 30% of total outlay as R&D spend, reduced from 40% under the current scheme, benefitting more smaller businesses engaged in intensive R&D activities, particularly start-ups.

Among the new measures being introduced, the upcoming restriction on claiming tax relief for overseas subcontractors will affect many companies. Under the old rules businesses could subcontract research and development projects and activities anywhere in the world. From April onwards, businesses will only be able to claim tax relief on work subcontracted to other UK companies, a move aimed at boosting jobs and innovation in the UK.

Grant Snedden, corporation tax manager at Henderson Loggie, said: “We welcome advanced scrutiny from HMRC to clamp down on fraud and error in relation to R&D tax claims, but we don’t want to see our clients who have genuine claims adversely affected.

“We also welcome the news of the introduction of the R&D intensive scheme which is more inclusive and means there is less of a drop in tax relief for qualifying claims.

“Companies should review their activities to see if they meet the 30% threshold. If SMEs are using overseas subcontractors, it is worth checking if that work can revert to the UK to make up the value of qualifying expenditure.”

Businesses will still have some scope to claim for overseas sub-contractors if it can be shown that it is not possible to do the work in the UK. But just because it’s cheaper, or that people are not available to do the work, will not be a good enough reason to sub-contract to foreign companies.

Another change coming in under the merged scheme is a restriction on who can make a claim which will stop two companies claiming R&D on the same project. Under the merged scheme, only the company that initiates and therefore bears the risk of the R&D can make a claim.

Mr Snedden said: “This means that SMEs should pay particular attention to having contracts in place that make clear who has initiated the R&D on a project, and who is carrying out the work.

“SMEs should review contracts to ensure that either they are eligible to submit a claim for the work undertaken, and if not, they may wish to review their commercial terms to ensure they factor this into their pricing.

“Overall and despite the changes, R&D tax credits will still be a valuable relief to SME businesses who embark on innovative research and development projects.”