Important R&D Tax Credit Trends Observed in 2024

In 2024, several significant trends are impacting R&D tax credits in the UK. With HMRC becoming more strict and its new regulations, businesses need to keep up with the changes and stay informed to make the most of their benefits.

But first and foremost, what are R&D Tax Credits?

R&D tax credits are a government incentive designed to encourage companies to invest in research and development. They allow businesses to reduce their corporation tax liability or receive a cash refund based on their eligible R&D expenditure. This can be a significant source of funding for companies developing new products, processes, or services, helping to offset the costs associated with innovation. So, what changes are we seeing in 2024 that will affect businesses?

Tighter Reviews from HMRC

In 2024, HMRC has ramped up its efforts to tackle false or exaggerated R&D tax credit claims. With a substantial increase in the number of inspectors dedicated to scrutinising claims, businesses need to ensure that their claims are accurate and well-documented. HMRC is now reviewing around 25% of claims, compared to just 1-2% in previous years. This increased scrutiny has led to delays in processing claims and increased rejections.

• What this means for you
  Ensure that your R&D activities are clearly defined and keep detailed records of all project expenses. Consulting with a tax advisor or specialist can help ensure your claims are compliant and robust.

Focus on Software Development Claims

HMRC is particularly focusing on software development claims due to the difficulty in proving technological advancement. Businesses involved in software R&D must clearly demonstrate how their projects are addressing scientific or technological uncertainties beyond routine development or configuration tasks.

• How to prepare
  Be specific in describing the advancements and challenges your software development projects are tackling. Highlight the innovative aspects and how they differ from existing technologies in the market.

Introduction of the Advanced Notification Form

Starting in April 2023, companies with first accounting periods beginning on or after this date must submit an Advanced Notification Form to notify HMRC of their intention to make an R&D claim. This form must also be submitted if a claim is being made more than six months after the year-end, even if the company has previously claimed R&D tax credits.

• Why it matters
  This new requirement adds another layer of administrative work for companies. Staying organised and proactive in your R&D tax credit claims process will be crucial to avoid missing deadlines and ensure compliance.

Changes to the SME and RDEC Schemes

A significant change coming into effect from April 2024 is the merging of the SME (Small and Medium Enterprises) and RDEC (Research & Development Expenditure Credit) schemes. The merged scheme aims to simplify the administration process but reduces the benefits available under the SME scheme. For non-intensive loss-making SMEs, the repayment rate will drop, impacting cash flow for smaller businesses.

• Impact on your business
  If you’re a small business heavily reliant on R&D tax credits, it’s essential to plan for reduced cash flow from these claims. Consider alternative funding options or adjust your budget to accommodate these changes.

Adjustments for R&D-Intensive Companies

R&D-intensive companies, defined as those with a high proportion of their expenditure allocated to R&D, will see a reduction in the enhanced expenditure rate from 40% to 30%. This change will affect how claims are calculated for periods straddling the implementation date.

• What you need to do
  Review your R&D project budgets and adjust accordingly to ensure that you are maximising your claims under the new rules. Seek guidance from a tax advisor if you’re unsure how these changes will impact your specific situation.

Common Questions About R&D Tax Credits

Q: How do I know if my project qualifies for R&D tax credits?
A: R&D tax credits apply to projects that seek to overcome scientific or technological uncertainties. This means your project must aim to develop new or improved products, processes or services that go beyond common knowledge in your field.

Q: What types of expenses can I claim under R&D tax credits?
A: Eligible expenses include staff costs, materials, software, and utilities directly related to the R&D project. Subcontractor costs may also be eligible, depending on the nature of the work and the relationship between the parties.

Q: How long does it take to receive R&D tax credits?
A: Due to increased scrutiny, processing times have lengthened. It can take several months for HMRC to review and approve claims. Ensuring your claim is accurate and well-supported can help expedite the process.

Q: Can I claim R&D tax credits if my project fails?
A: Yes, unsuccessful projects can still qualify for R&D tax credits as long as they aim to achieve scientific or technological advancements and encounter genuine uncertainties.

Q: How can I avoid my claim being rejected?
A: Keep detailed records of your R&D activities, expenses, and outcomes. Be honest and transparent in your claims and consult with a specialist if you’re unsure about any aspect of the process.

Preparing for the Future of R&D Tax Credits

With these changes and increased scrutiny, it’s more important than ever for businesses to be diligent in their R&D tax credit claims. Here are some tips to help you navigate the evolving landscape:

1. Maintain Detailed Records: Document all aspects of your R&D projects, including the challenges faced, solutions attempted, and the time and resources allocated.
2. Stay Informed: Keep up-to-date with the latest changes in R&D tax credit rules and regulations. Regularly consult HMRC’s guidance and consider attending webinars or workshops on the subject.
3. Seek Professional Help: If your business is heavily involved in R&D, consider working with a tax specialist who can help you navigate the complexities of the claims process and ensure you’re maximising your entitlements.

Keeping Up with Changes in R&D Tax Credits

The world of R&D tax credits is evolving, and businesses must adapt to keep reaping the benefits. By understanding the latest trends and preparing for upcoming changes, you can continue to leverage R&D tax credits as a vital source of innovation finance for your business. Stay proactive, stay informed, and make the most of the opportunities available to support your R&D efforts in 2024 and beyond.

Need help with your R&D tax credits? Get in touch with one of our specialists today and make sure your business is on the right track to secure the funding it deserves!