R&D Tax Rebates in the UK

An independent report written by Mark Stephens, commissioned by R&D Funding Group Limited

Establishing your eligibility for claiming R&D Tax credits has never been more crucial. In response to rising concerns about fraudulent and false claims the UK government has significantly tightened its stance, leading to a notable increase in rejected claims and fraud investigations. This crackdown has resulted in a higher rate of failed claims, reflecting the government’s commitment to ensuring that only genuine R&D activities receive support.

Despite these stringent measures, the value of accepted claims has remained relatively stable between 2023 and 2024. This demonstrates that the government’s R&D budget is still available to eligible companies that comply with HMRC guidelines. However, the risk of failure and the likelihood of facing an HMRC investigation has increased, underscoring the importance of adhering to the new administrative requirements.

To navigate these changes and maximise your chances of a successful claim, it is essential to choose an appropriate representative who can expertly handle your R&D tax relief application. Ensuring compliance and accuracy in your claim will not only help you secure the relief you are eligible for, but also protect you from potential scrutiny and penalties.

2023 Claim Data

Number of Claims: Approximately 65,690 claims were made, marking a 21% decrease from the previous year

Amount Claimed: The total amount of R&D tax relief support claimed was £7.5 billion, a slight increase of 1% from the previous year

Success Rate: The success rate of claims was impacted by administrative changes aimed at reducing error and fraud, leading to a notable decline in the number of claims

2024 Claim Data

Number of Claims: Data for 2024 is still being compiled and will be updated in future reports. Preliminary figures suggest a continuation of trends observed in 2023

Amount Claimed: Provisional estimates indicate a similar level of total claims as in 2023, with adjustments expected based on final submissions

Success Rate: The success rate is anticipated to reflect ongoing administrative improvements and compliance measures

Key Changes to R&D Tax Claims Introduced in 2024

Merger of RDEC and SME Schemes: From April 2024, the two separate RDEC (Research and Development Expenditure Credit) and SME (Small or Medium-sized Enterprise) tax credit schemes have been merged. This change aims to streamline the relief process and help control its overall cost
Additional Information Form: Since August 2023, companies have been required to provide an Additional Information Form when making claims. This form is designed to improve compliance and reduce error and fraud
Changes in Relief Rates: The rates of relief have been adjusted. For profitable companies, the merged scheme offers a headline rate of 20%, translating to a post-tax rate between 14.7% and 16.2%, depending on the level of taxable profits and the corporation tax rate applied
Focus on R&D Intensive Companies: Loss-making R&D intensive companies, where qualifying R&D expenditure constitutes at least 40% of total expenditure, will see specific adjustments in their subsidy rates (applicable to R&D activities undertaken from April 2023 onwards). This 40% expenditure level reduced to 30% for accounting periods starting on or after 1^st April 2024.

These changes are part of the government’s broader strategy to increase R&D investment to 2.4% of UK GDP by 2027, making the tax relief more effective and ensuring better compliance.

Implications for SMEs

The changes to R&D tax relief introduced in 2024 have several implications for small businesses:

Reduced Relief Rates: The merger of the RDEC and SME schemes means that small businesses will now receive a lower rate of relief compared to the previous SME scheme. This could impact their financial planning and investment in R&D
Increased Compliance Requirements: The introduction of the Additional Information Form requires businesses to provide more detailed information when making claims. This could increase the administrative burden on small businesses
Focus on R&D Intensive Companies: Small businesses that are R&D intensive (where qualifying R&D expenditure constitutes at least 40% (from April 2023) or 30% (from April 2024) of total expenditure) will benefit from specific adjustments in their subsidy rates

Complying with the Changes

To ensure compliance with these changes, companies can:

Review Current R&D Projects: Assess current and planned R&D projects to ensure they meet the new criteria for relief. This includes understanding the qualifying rules and the impact of the merged scheme
Enhance Record-Keeping: Improve documentation and record-keeping practices to comply with the new requirements, including the Additional Information Form
Seek Professional Advice: Consult with tax professionals or advisors who specialise in R&D tax relief to navigate the changes and optimise claims
Plan Financially: Adjust financial projections and budgets to account for the potential reduction in relief rates and increased administrative costs

Explanation of RDEC and SME Schemes

RDEC (Research and Development Expenditure Credit)

Eligibility: Initially designed for large companies, but SMEs can also claim under RDEC if they receive grants or subsidies.

Mechanism: Provides an above-the-line credit, which is taxable. This means the credit is shown as income in the company’s accounts, making it visible to shareholders and investors

Rate: Before the merger, the RDEC scheme offered a headline rate of 13%, translating to a post-tax rate of around 10.5%

SME Scheme

Eligibility: Specifically for small and medium-sized enterprises with fewer than 500 employees and either less than €100 million turnover or €86 million net assets

Mechanism: Provides an enhanced deduction, allowing SMEs to deduct an extra 130% of their qualifying R&D costs from their annual profit

Rate: Before the merger, profitable SMEs could receive a net benefit of 24.7%, while loss-making SMEs could receive a repayable credit of up to 33.4%

Merged Scheme (Effective from April 2024)

Unified Structure: Combines elements of both RDEC and SME schemes to streamline the relief process

Rates: Offers a headline rate of 20%, with post-tax rates varying between 14.7% and 16.2% depending on taxable profits and corporation tax rates

Focus on R&D Intensive SMEs: Provides enhanced support for loss-making, R&D intensive SMEs

These changes aim to simplify the R&D tax relief system while ensuring it remains effective and fiscally sustainable.

Recommendations for Making an R&D Tax Claim

Early Planning: Start planning your R&D tax claim early in the project lifecycle to ensure all qualifying activities and costs are captured
Consult Professionals: Engage with tax professionals or advisors who specialise in R&D tax relief to navigate the complexities and optimise your claim
Detailed Documentation: Maintain thorough records of all R&D activities, including project descriptions, objectives, and outcomes. This documentation should clearly demonstrate the scientific or technological advancements and uncertainties addressed
Accurate Cost Tracking: Keep detailed records of all costs associated with R&D activities, including staff time, materials, and subcontractor expenses
Compliance with New Requirements: Ensure you are familiar with and comply with the latest HMRC requirements, such as the Additional Information Form introduced in August 2023
Regular Reviews: Periodically review your R&D projects and claims to ensure ongoing compliance and to identify any additional qualifying activities or costs
Training and Awareness: Educate your team about the importance of accurate record-keeping and compliance with R&D tax relief requirements
Potential Processing Delays and Increased Scrutiny: HMRC has ramped up compliance checks and staffing to review R&D claims. Therefore, businesses need to factor in potentially longer waiting times for claim processing, especially if there is back-and-forth on documentation or further justification required of qualifying activities
First-Time Claimants’ Pre-Notification Obligation: First-time claimants (or those who haven’t claimed in the past three years) may need to inform HMRC in advance (commonly known as pre-notification). It is important that new applicants meet notification deadlines to avoid missed claims
Overseas R&D Expenditure Rules: Recent guidance has tightened which overseas costs qualify for relief. Businesses that rely on global subcontractors or non-UK staff to review the updated criteria need to ensure eligible expenditures are claimed correctly and ineligible overseas costs are excluded

Checklist for R&D Tax Claims

Determine Eligibility:

Confirm that your project seeks an advance in science or technology
Ensure the project addresses scientific or technological uncertainties

Gather Necessary Documentation:

Detailed project descriptions and objectives
Records of experiments, trials, and outcomes
Evidence of scientific or technological uncertainties and how they were addressed

Identify and Track Eligible Costs:

Staff costs directly involved in R&D
Consumables and materials used in R&D
Subcontractor and external staff costs
Software and utilities used in R&D

Complete the Additional Information Form:

Provide detailed information about the R&D activities and costs
Ensure accuracy and completeness to avoid delays or rejections

Calculate R&D Tax Relief:

Use the correct rates and calculations for the merged scheme effective from April 2024
Ensure all qualifying costs are included

Submit the Claim:

Include the R&D tax relief claim in your Company Tax Return
Attach the Additional Information Form and any other required documentation

Review and Verify:

Double-check all information and calculations for accuracy
Ensure all documentation is complete and supports the claim

Prepare for HMRC Compliance Checks:

Be ready to provide additional information or clarification if requested by HMRC
Maintain organised records to facilitate any compliance checks or audits

By following these recommendations and checklist items, companies can reduce the risk of their R&D tax claims being declined and avoid potential investigations by HMRC into fraud or errors.

If you want to check if your R&D activities qualify for R&D Tax Credits, or if you already claim and want to ensure you remain compliant following the recent reforms, please contact us for a FREE consultation.

Citations

Corporate Tax: HMRC Research & Development Tax Credits

Research and Development Tax Credits Statistics: September 2024 – This source provides detailed statistics on the number of claims, amount claimed, and success rates for R&D tax relief in the UK for the tax year 2022 to 2023
Approach to Research and Development Tax Reliefs 2023 to 2024 – This document outlines HMRC’s approach to R&D tax reliefs, including policy and operational changes aimed at reducing error and fraud, and provides data on the impact of these changes
Corporate Tax: Research and Development Tax Credits – This source offers experimental statistics and breakdowns of R&D tax credit claims by various factors, including industrial sector and geographic location