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Merging R&D Schemes: What Changes in 2024

We’re diving into some exciting developments in Research and Development (R&D) tax schemes. Get ready to explore the changes shaking things up in 2024 and how they might impact your business. Let’s delve into the details.

A New Era for R&D Tax Relief

The Autumn Statement 2023 dropped significant news for businesses engaged in R&D activities. One of the biggest announcements was the merger of the Small or Medium Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme. This change kicks in from the 1st of April 2024 for accounting periods and aims to make life easier for businesses like yours when seeking R&D tax relief.

The Two Schemes: What You Need to Know

With the merger in full swing, here are the two options that businesses have:

  • The Merged Scheme: Think of this as the all-in-one package deal. With elements from both the SME and RDEC schemes, it’s your go-to for claiming R&D tax relief in a streamlined way.
  • Enhanced Relief for Loss-making R&D Intensive SMEs: This one’s tailored for R&D pros. If your business is about pushing boundaries in research and development, this scheme’s the one for you. Plus, it gives extra relief for those whose R&D game makes up a big chunk (30% or more) of their spending.

Consistency in Contracted-Out R&D

To ensure everything is fair across the board there are some new rules in place. Now, when figuring out who can claim relief for R&D work, there’s a clear set of guidelines for both customers and contractors. These rules kick in for accounting periods starting on or after the 1st of April, 2024, bringing some much-needed clarity and consistency to the whole process. It’s all about making sure everyone’s on the same page.

Subsidised Expenditure: Streamlining the Process

With these fresh contracted-out R&D rules in play, some old rules about subsidised expenditure in the SME scheme aren’t as important anymore. As a result, they’ve taken those sections right out of the legislation for the merged scheme, simplifying the process for businesses wanting R&D tax relief.

Enhanced Tax Relief for R&D Intensive SMEs: A Lower Threshold and Grace Period

Starting from the 1st of April, 2024 the bar for qualifying as an R&D-intensive SME will be lowered from 40% to 30% of total expenditure. Plus, there’s a one-year grace period to help businesses transition smoothly to the new threshold requirements. This adjustment provides added flexibility while maintaining the focus on encouraging innovation.

Claiming the Enhanced Rate: Revised Forms and Procedures

From the 1st of April, 2024, an extra revamped information form will be available for businesses wanting to claim the improved SME rates. This form, which will streamline the process for submitting claims under the SME-intensive scheme, will be accessible after the Finance Bill receives Royal Assent.

Limiting Nominations and Transfers: Payments Go Straight to Your Company

From the 1st of April, 2024, HMRC will send R&D tax credits directly to the company making the claim, where the company will need to provide their payment details. There are some exceptions, though; if you want the payment sent to someone connected to your company, you’ll need to explain how they’re connected. 

Cancelling New Assignments: Making Sure Things Are Fair and Clear

To make things fair and transparent, any new deals to transfer R&D tax credit payments after the 22nd of November, 2023, won’t count once the Autumn Finance Bill becomes law. But if the deal was completed before that date it’s fine. HMRC will still accept nominations for claims made before the 1st of April, 2024, keeping everything straightforward and consistent.

Embracing Change for a Brighter Future

In a nutshell, prepare for some exciting shifts in the world of R&D tax schemes, set to shake things up for businesses in 2024 and beyond. With the merger of the SME and RDEC schemes, claiming R&D tax relief should be much smoother. Businesses now have two main options, the Merged Scheme and Enhanced Relief for Loss-making R&D Intensive SMEs, both geared towards sparking innovation while simplifying the process. Also, revised forms and procedures and direct payments to companies making a claim aim to improve business efficiency and transparency. While changes are underway, the goal to create an innovative and successful environment is clear. So, embrace these changes, stay informed, and continue pushing the boundaries.

Ask for Help

If you want to make the most of these R&D tax relief changes but are unsure where to start, give us a call on 01603 630882 or fill out our online form, and we’ll be happy to help. 

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The Future of UK R&D Funding: Tax Credits and Beyond

The UK government has announced an update on its plans for the largest-ever R&D budget from 2022 to 2025, showing its commitment to fostering innovation and technological advancement. The comprehensive strategy for R&D funding, underpinned by significant budget allocations and tax relief reforms, underscores the UK’s ambition to remain a competitive hub for cutting-edge research. Let’s look in more detail at what this means for the future of R&D funding.

Record Budget Allocation for R&D

The UK government has confirmed its largest-ever R&D budget, totalling £39.8 billion for 2022-2025. This unprecedented level of funding, an increase of £5 billion to £20 billion per annum by 2024-2025, represents a 33% rise over the current parliament. The allocations under this budget are poised to strengthen the UK’s R&D system, with the overarching goal of elevating the country as a global leader in science and innovation​​. 

Strategic Investments

The government’s R&D investments are strategically directed to support the UK’s Innovation Strategy, to increase total R&D investment to 2.4% of GDP by 2027. Key areas of focus include climate change, new technology sectors such as clean tech and AI, and levelling up opportunities across the nation. The UK Space Agency will see its budget grow to over £600 million by 2024-2025, emphasising the economic and strategic importance of the space sector​​.

Regional Development

In line with the Levelling Up White Paper, the government has committed to increasing public R&D investment outside the greater South East by at least a third, ensuring fair regional distribution and economic balance. This approach is expected to bolster confidence in business investment in R&D, leveraging private investment and fostering innovation across the country​​.

Reforming R&D Tax Relief

To complement direct budget allocations, the government has introduced significant reforms to R&D tax reliefs, affecting companies under the Research and Development Expenditure Credit (RDEC), the small or medium enterprises (SME) R&D relief, and those with Patent Box elections​​.

Extending Qualifying Expenditure

From April 2023, the scope of qualifying expenditures for R&D tax relief expanded to include the costs of datasets and cloud computing. These changes aim to incentivise R&D using digital approaches and include previously excluded areas like pure mathematics​​.

Refocusing on UK-Based Innovation

To maximise the benefits of R&D activities within the UK, the government is refocusing relief on domestic activity. Restrictions will apply to subcontracted work and costs of externally provided workers, with certain exemptions for specific international research needs​​.

Improving Compliance and Tackling Abuse

All claims for R&D reliefs must be made digitally, with detailed cost breakdowns and descriptions of the R&D projects. Pre-notification to HMRC is required, along with disclosure of any advising agents, aiming to improve compliance and prevent abuse of the system​​.

Future Outlook and Stakeholder Engagement

The government’s target to raise total investment in R&D to 2.4% of GDP by 2027 is ambitious. The R&D tax reliefs are crucial in reducing innovation costs and encouraging private-sector investment. Following extensive stakeholder consultations, reforms to the R&D tax relief system were announced, ensuring that these reliefs remain competitive and up-to-date, and effectively target taxpayer funds towards meaningful innovation​​​​.

Embracing Feedback for Enhanced Guidance

Before announcing its commitment, HMRC published draft guidance reflecting the upcoming reforms to the R&D tax reliefs, taking into account feedback from stakeholders, including industry groups, businesses, and accountancy professionals. This collaborative approach has been vital in refining the guidance, ensuring it effectively addresses the needs and concerns of those engaging in R&D activities​​.

A Dynamic and Robust Future for Research and Development

The future of UK R&D funding is dynamic and robust, marked by substantial government investment and strategic reforms to tax reliefs. These initiatives aren’t just financial mechanisms but represent a concerted effort to cultivate a fertile environment for innovation and technological progress in the UK. 

The focus on regional development, alongside the emphasis on modernising and securing R&D tax relief systems, sets a precedent for sustainable and inclusive growth in the research and innovation sectors. As these changes unfold, businesses and stakeholders in the R&D world can expect to see a landscape ripe with opportunities, supported by a government keen on nurturing a global science and innovation superpower.

Find out more

Find out more about the recent government announcement here

Read the full policy paper ‘Research and Development Tax Relief Reform’ here 

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How To Claim Corporation Tax Relief Costs On R&D If You’re An SME

As the UK continues to become a global hub for innovation, the government has implemented a range of financial incentives to encourage businesses to undertake research and development (R&D) activities. For example, the R&D tax credit system is designed specifically for Small and Medium-sized Enterprises (SMEs) and aims to lessen the financial burden of innovation costs. If you’re an SME working on projects in science and technology, it’s wise to take time to explore how to navigate this benefit to maximise your corporation tax relief to ensure you’re not paying more tax than you need to.

What is R&D Corporation Tax Relief for SMEs?

Before diving into the claiming process, it’s important to understand the tax relief itself. 

R&D Corporation Tax Relief allows SMEs to deduct an extra 86% of their qualifying R&D costs from their yearly profit. This is on top of the usual 100% deduction, making a total potential deduction of 186%.

For SMEs operating at a loss, there’s an option to claim a tax credit worth up to 10% of the surrenderable loss. In essence, it can provide a cash injection when the company needs it most.

Do You Qualify?

R&D tax relief is there to support companies working on innovative projects in science and technology. With this in mind, you can’t claim if the advance is in the arts, humanities or social sciences.

To claim R&D tax relief, you must be a UK-based SME with:

  • Fewer than 500 staff.
  • A turnover of under €100m or a balance sheet total under €86m.

What’s more, the R&D project should aim to achieve an advancement in science or technology, and you’ll need to show how a project had to or tried to overcome scientific or technological uncertainty.

Steps to Claim Corporation Tax Relief on R&D for SMEs

  1. Maintain Accurate Records: Ensure you have robust records detailing all R&D activities and associated costs. This will help calculate your R&D expenditure and provide evidence if HMRC ever asks to see it.
  1. Identify Qualifying R&D Activities: This is a nuanced process, and not all activities related to R&D might qualify. Generally, tasks directly contributing to seeking an advancement in science or technology, or supporting such activities, can be included.
  1. Define the Qualifying Expenses: These can include:
    • Staff salaries, wages, and NICs.
    • Certain subcontractor costs.
    • Materials and consumables used up in R&D processes.
    • Some types of software.
    • Data licence costs and cloud computing costs (for accounting periods beginning on or after 1 April 2023)
    • Utilities, like power, water and fuel used in R&D.

Remember, the goal here is to focus on the tax relief and not the expenses per se. Therefore, make sure you’re meticulous in identifying what counts towards the relief. Find out more about which costs qualify here.

  1. Calculate the Enhanced Expenditure

Once you’ve identified the qualifying activities and expenses, there are a few calculations to do before preparing and submitting your claim, namely:

  1. Reduce any relevant subcontractor or external staff provider payments to 65% of the original cost.
  2. Add all the costs together.
  3. Multiplying the figure by 86%
  4. Add this to the original R&D expenditure figure.
  1. Before Submit a Claim Notification

From the 1st of April 2023, you might need to submit a claim notification form to let HMRC know your claim is coming. This is usually if you’re claiming for the first time or your last claim was made more than three years ago. Find out what you need to provide here.

  1. Submit a Claim Notification

From the 8th of August 2023, you must submit an additional information form to support your claim before you submit your company’s Corporation Tax Return. Failing to do so will result in your claim being removed. Find out more here.

  1. Prepare and Submit Your CT600: Your claim for R&D tax relief is made in your Company Tax Return by:
  • completing the single iXBRL computations file
  • putting an ‘X’ in box 656 to say you’ve submitted the claim notification form
  • putting an ‘X’ in box 657 to say you’ve submitted the additional information form
  • completing the supplementary form CT600L, if you’re claiming a payable tax credit or R&D expenditure credit
  1. Claim within Time Limits: Make your R&D tax relief claim within two years of the end of the accounting period the R&D expenditure was incurred. Also note that if your tax relief claim covers more than 12 months, you must submit a separate claim for each accounting period.

A Few Extra Considerations

When it comes to working out the financials for R&D costs and making a claim, there are a couple more things to consider.

External Investors: If your company has external investors, the staff, turnover, and balance sheets of any linked or partner enterprises may need to be included. Find out more here. 

R&D Tax Relief Advance Assurance: If you’re making your first claim for tax relief as an SME, you may be able to apply for advance assurance for your first three accounting periods. It’s a voluntary scheme to give assurance your claims will be processed without further enquiry from HMRC and is there to help businesses in their early phases of growth. Find out more here.

Final Thoughts

R&D Corporation Tax Relief offers a significant financial benefit to SMEs driving innovation in the UK. However, navigating the relief process can be intricate. By keeping comprehensive records, understanding the specifics of qualifying costs, and seeking expert advice when needed, your company can harness the full power of this incentive.

At Norwich Accountancy, we pride ourselves on guiding SMEs through the complexities of the tax landscape, helping you to capitalise on every available benefit. If you have questions or need assistance with your R&D tax relief claim, don’t hesitate to reach out.