There has been a raft of Research and Development (R&D) tax relief changes over the last 18 months. This article provides an overview of the most significant reforms.
Whether you’re a business owner or a finance manager/CFO, now is the time to familiarise yourself with these R&D tax changes and how they will be implemented.
Overview of key changes from April 2024
- Merged scheme for R&D tax relief (SME & RDEC)
- Changes in treatment of contracted out R&D
- Overseas R&D restrictions
- Removal of restrictions for subsidised R&D expenditure
- Mandatory additional information for R&D claims (came into effect from 8 August 2023)
- Qualifying costs around data license, cloud computing and pure mathematics (came into effect 1 April 2023)
- R&D claim pre-notification (came into effect 1 April 2023)
Merged scheme for R&D tax reliefThe merged R&D scheme sees two of the UK’s current R&D tax relief incentives (SME and RDEC) brought together into a single scheme and is sometimes referred to as the R&D single scheme or simplified scheme. It will be implemented in a similar way to the existing RDEC scheme with a few notable distinctions.
When is the merged scheme coming into effect?
The merged scheme for R&D tax relief will apply for accounting periods beginning on or after 1 April 2024. It’s important to note that this is not for expenditure incurred from the start of April as previously proposed. For example, a business that prepares accounts to 31 December each year will enter the merged scheme for the first time when considering an R&D claim for its accounting period ending 31 December 2025.
What are the new merged R&D scheme rates?
Changes in the treatment of contracted out R&D Subcontracted R&D is a particularly complex area and the merged scheme aims to target R&D tax relief to the company making the decision to carry out R&D and in turn bearing the risk. This broadly means that where a company with a valid R&D project contracts a third party to undertake R&D activities on its behalf, the company may claim the qualifying costs of that work. More draft guidance from HMRC on this area can be found here.
The definition of contracted out R&D is new and therefore as a business you need to carefully consider your position in any supply chain to determine the correct position under the merged scheme.
Overseas R&D restrictions From 1 April 2024, third party costs will only be eligible if, for subcontractors, the work has been performed in the UK, and for Externally Provided Workers (EPWs) if the payments are subject to UK PAYE. This includes freelance/agency workers.
It is worth noting this change only impacts third party costs. Directly employed staff based overseas will not be impacted. As currently drafted, there will be some limited exceptions
in circumstances where it would be wholly unreasonable to undertake the R&D in the UK. More draft guidance from HMRC on this area can be found here.
Removal of restrictions for subsidised R&D expenditure If you are in receipt of a subsidy or grant funding for your R&D activity, you will no longer see the amount of available R&D relief reduced (as currently happens under the SME scheme).
Mandatory additional information for R&D claims From 8 August 2023, all claims need to be accompanied by an additional form. This form will need to be submitted before the R&D claim, with detailed information required about the company who is claiming, each R&D project, and the detailed costs per project. Details of any R&D agent used and contact details for the senior officer responsible for the claim will also need to be provided.
R&D claim pre-notification Companies are now required to notify HMRC in advance if they intend to make an R&D claim. The deadline for making the notification is six months after the end of the accounting period they wish to make a claim for. However, companies will not need to notify if they have submitted a claim in the three years ending on the last day of the notification period.
Suggested actions Documentation is key! With these changes and an increased requirement for more evidence, it is more important than ever to keep very clear documentation on your R&D work. For example, conversations should be logged, milestones documented, timesheets recorded, etc.
Check your relationships and contracts with suppliers where you are contracting R&D to – review these contracts carefully and ensure that you are retaining the right to claim R&D. Ensure you have contracts in place for evidence
• Check to see if exemptions for overseas activities would apply to you
• Ensure you submit Additional Information Form before submitting an R&D claim
• Consider whether a ‘pre-notification’ is required to HMRC
If you are unsure on any of these points, you should speak to your R&D adviser.
Get in touch
If you have any queries relating to R&D or these changes, get in touch with us today at info@oldfieldadvisory.com or call 02476673160 to speak with one of our consultants.
Please note: This article is provided for information only and was correct as at time of writing (16/05/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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