A new era for R&D tax relief has arrived

Liam McHenry
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After a decade of relative stability, major changes arrived for the UK R&D tax regime on 1 April 2024.

Last month, confirmation of when the new rules would come into effect was provided, despite unsuccessful requests from various accountancy and tax institutes to delay it. 

The new rules for businesses with an accounting period beginning on or after 1 April 2024 have now commenced. These entities will be within the new merged ‘RDEC’ style scheme, with the exception of ‘highly R&D intensive companies’. Companies with over 30% of their yearly expenditure qualifying for R&D tax relief will still be able to claim under a restricted version of the SME scheme however, given this is a high bar, it is likely that only small-scale tech start-ups will qualify.  

For everyone else, the new rate will provide a benefit worth approximately 15p per £1 of qualifying expenditure, so not all is lost for those exiting the SME scheme, as a generous tax incentive remains for potential claimants. 

The stated aim of the merged scheme was to reduce complexity for claimants and their advisors. With two schemes remaining post-merger, it would seem that there is unfortunately more complexity than before.  

Subcontracted expenditure had previously been excluded under the RDEC scheme in any meaningful way, however under the new merged scheme; a new system has been put in place. The new rules intend to reward whichever party decides to undertake the R&D activity. This adds a new dimension to determining the eligibility of qualifying R&D expenditure, in that it will now be necessary for a subcontractor to determine whether they believe their customer knew that the project would require R&D activity to be undertaken.

The theory is that this will remove the potential for both parties to claim on the same project, although it is easy to see where ambiguity may arise regarding whether the client anticipated routine work or was aware of subcontracted R&D activities. 

When entering into contracts with customers, claimants should now pay additional attention to any clauses relating to IP generation and whether they indicate that R&D will be required. Taking care at this stage could help claimants identify and preserve their right to claim the corresponding tax relief. 

1 April 2024 also introduced a restriction on overseas expenditure. Simply put, this means that unless there is a compelling reason why the expenditure could not reasonably have been incurred in the UK, then it will not be eligible for inclusion in the claim - unless the company is based in Northern Ireland. 

Recognising the unique position of Northern Ireland and its significant integration with the neighbouring Republic of Ireland, claimants can bypass this new restriction, gaining up to a maximum additional benefit of £250,000 every three years. Some additional administration perhaps, but a very welcome reprieve from the restriction, which would have proved costly. 

This is a brief summary of the main rule changes coming into effect this month, but in reality, there are many more of which claimants should be aware. HMRC has dramatically increased its compliance efforts, with recent revelations from the Public Affairs Committee indicating that upwards of 20% of new R&D claims are now under scrutiny.

While this fact alone should not be a major concern, it is worth noting that this increased scrutiny often comes with an aggressive stance, beginning with the assumption that R&D claims should be disallowed.The experience of one claimant to another can dramatically vary depending on which caseworker is allocated to the enquiry but regardless, the reality is that when an enquiry is opened, it can be a prolonged process before any conclusion can be reached. 

In the event of an unsuccessful enquiry defence, HMRC will be obligated to consider whether any penalties should be levied, depending on whether they determine that the claim was prepared carelessly (or worse!). In addition, depending on the level of disclosure provided in previous claims made in recent years, they would have the ability (and are actively encouraged) to look into these previous claims, beyond the normal enquiry window. 

When dealing with any complex area of the tax legislation, I would always recommend seeking professional advice. Whether or not something is sufficiently innovative to qualify for tax-relief can be a subjective area, so an advisor can be invaluable. A recent case before the First Tier Tax Tribunal ruled that it would be inappropriate for HMRC to levy a careless penalty when a taxpayer sought guidance from a qualified advisor.

Whilst this is a non-binding decision, it does provide additional encouragement to reach out to a specialist. Finally, given the current environment, when engaging with an advisor it would also be worthwhile checking whether they provide any form of insurance against the costs of defending an enquiry.