R&D – what’s new?

From 1 April 2024, the merged R&D scheme replaced the existing Small and Medium Enterprise (SME) and Research and Development Expenditure Credit (RDEC) R&D tax relief regimes. This applies for all R&D claimant companies with accounting periods beginning on or after 1 April 2024. This significant change comes as a result of an extensive government review of R&D tax relief in the UK and aims to provide a simpler method for companies to claim R&D tax relief.

Alongside the merged scheme, Enhanced R&D Intensive Support (ERIS) is also being introduced. This applies to ‘R&D intensive’ loss making SMEs with accounting periods beginning on or after 1 April 2024. In a change to the prior R&D intensive SME tax credit, the R&D intensity threshold for ERIS will be reduced from 40% to 30%, widening the scope to a larger number of eligible SMEs. HMRC expects ERIS to be available to 23,000 of the 39,000 loss making SME tax credit claimants, providing £50million of support per year by 2028-2029.

The support is an extension of the previous tax credit for R&D intensive loss-making SMEs and recognises the value of the highly innovative R&D intensive SMEs in the UK which are most significantly impacted by changes to R&D tax relief.

Anti-abuse measures

A company is entitled to only one relief under either the merged scheme or ERIS. This measure is in place to ensure no overlapping claims in respect of the same expenditure.

Other R&D changes

In addition to the new R&D regimes are a wealth of changes regarding some of the key rules when determining R&D eligibility. These new rules are applicable for both the merged scheme and ERIS, so apply to accounting periods beginning on or after 1 April 2024. Some of the most significant changes include:

• Contracted-out R&D – new rules have been written to determine who is eligible to claim R&D relief
• Overseas expenditure – Contractor and Externally Provided Worker (EPW) payments must now relate to R&D undertaken in the UK
• Subsidised R&D – rules surrounding subsidised expenditure have been removed, meaning a company’s eligibility to SME R&D tax relief is no longer blocked by the receipt of funding in relation to R&D activity

The new contracted out R&D rules

A new set of rules regarding contracted out R&D look to simplify the eligibility of a company to claim for R&D activity undertaken. The underlying principle behind the rules aims to ensure R&D relief is available to the company which makes the decision to undertake R&D and the new rules apply to both upstream (client) and downstream (contractor) contractual relationships.

In situations where two or more parties are involved, R&D relief will be deemed contracted-out where ‘it is reasonable to assume…that the customer intended or contemplated this sort of R&D would be done’.

HMRC’s new guidance on contracted out R&D provides a range of relevant examples, demonstrating how the guidance could be applied in practice. Given eligibility will depend on the exact facts of the relationships between parties, establishing whether a company is able to make a claim to R&D relief will require consideration of the specific commercial and contractual arrangements in place.

HMRC have indicated that a compliance enquiry is likely to arise where both parties to a contract attempt to claim relief for the R&D activity undertaken, highlighting the need for detailed analysis of the contractual relationship to ensure an appropriate and substantiated filing position.

What’s new for overseas R&D?

New rules relating to subcontractor and Externally Provided Worker (EPW) payments made by a company require expenditure to relate to R&D undertaken in the UK.

Expenditure incurred on R&D undertaken outside of the UK by contractors and externally provided workers will be subject to satisfying a further condition before establishing whether it is qualifying R&D expenditure.

The qualification for R&D that is undertaken overseas requires that certain circumstances related to the conditions necessary for the purposes of the R&D are present overseas.

These circumstances are that the necessary conditions are not present in the UK (but are present in the location in which the R&D is undertaken) and that it would be wholly unreasonable for the company to replicate the necessary conditions in the UK.

Such conditions include geographical, environmental or social conditions or legal or regulatory requirements which mean the R&D may not be undertaken in the UK. Conditions related to the cost of the R&D or the availability of workers to carry out the R&D are however not included.

R&D updates on pre-notification requirements

For accounting periods beginning on or after 1 April 2023, HMRC have introduced a formal pre-notification requirement. This requirement forms part of the efforts to minimise non-compliance, including error and fraud.

This pre-notification needs to be completed by companies which are claiming R&D tax relief for the first time, or companies which have not made an R&D claim in the last three years.

Where applicable, the claim notification period runs from the start of the relevant accounting period until 6 months after the end of the accounting period. For companies with 31 March 2024 accounting dates (the first 12-month accounting period under the pre-notification rules), this period will run from 1 April 2023 (the first day of the accounting period) until 30 September 2024.

A representative from a company or an agent acting on behalf of the company can complete the claim notification form.

What information is required for the notification form?

To complete the notification form, the following information will be required:

• the company’s Unique Taxpayer Reference (UTR)
• the main senior internal R&D contact in the company who is responsible for the R&D claim, for example a company director
• the contact details of any agent involved in the R&D claim
• the accounting period start and end date
• a summary of the high-level planned activities to show that the project meets the standard definition of R&D

HMRC’s ongoing R&D compliance activity

In an attempt to tackle error and fraud, HMRC’s increased compliance activity continues, bringing with it significant uncertainty for claimant companies. With around 20% of R&D claims receiving an enquiry (or ‘compliance check’) from HMRC, it’s evident that claimants need to ensure their submissions are robust and compliant with HMRC’s guidance on R&D for tax purposes.

To ensure an R&D claim is robust, supporting detail should be capable of clearly outlining how and why an R&D project qualifies as R&D for tax purposes. As part of this, there is an expectation for claimants to capture and maintain contemporaneous project records, as to provide evidence which can support a company’s R&D claim. Whilst this expectation is not a new addition to the rules surrounding R&D tax relief, the increased scrutiny from HMRC means the likelihood of an enquiry is much higher than it has previously been. Additionally, HMRC published the ‘guidelines for compliance’ in late 2023, providing further specific detail on the expectations of R&D claims and R&D claimants, further highlighting the need for robust submissions to be made.

To discuss any other above new changes to R&D please contact Rob Waterhouse.