What Do the Recent Changes to R&D Tax Credits Mean?

Staying up to date with the recent updates to the Research and Development (R&D) tax credit system is incredibly important. If your business operates within UK Innovation R&D tax credits are a great tool to aid your cash flow. So, how will these changes affect businesses, and what do they signify for companies engaging in research and development?

Introduction of New R&D Schemes

From April 2024, two innovative schemes, The Merged Scheme and Enhanced R&D Intensive Support (ERIS), are set to overhaul the R&D tax credits in the UK. These changes aim to streamline the process and make tax relief more accessible and applicable. As a result, a wider range of businesses can be engaged in innovative projects.

The Merged Scheme

The Merged Scheme brings together the best aspects of the previous Small and Medium Enterprises (SME) and Research and Development Expenditure Credit (RDEC) schemes. It’s mainly structured like the RDEC but introduces some important new benefits:

• Subcontractor Expenses
  Unlike the traditional RDEC, which mainly serves larger companies, the Merged Scheme opens up opportunities for claims on subcontractor expenses. This change is especially beneficial for SMEs that rely heavily on external partners for their R&D projects. By allowing these claims, the scheme recognises and supports the collaborative way that modern R&D is often conducted.
• Simplification of Claims
  By combining two previously separate schemes, the Merged Scheme aims to cut through the confusion and make the process smoother for those applying. This should make it much easier for companies to figure out what they’re eligible for and how to claim it, reducing the hassle and letting them focus more on innovation.

Enhanced R&D Intensive Support (ERIS)

ERIS targets a specific segment of the business community—loss-making SMEs, which are often the most in need of support to continue their innovative activities. This scheme introduces several key changes:

• Lower R&D Intensity Threshold
  By reducing the R&D intensity threshold from 40% to 30%, ERIS broadens the eligibility criteria, allowing more SMEs to qualify for support. This adjustment recognises the varying levels of R&D intensity across different industries and company sizes.
• Changes in Subcontracting Rules
  One of the standout changes in ERIS concerns how it handles subcontracting. Now, the company that initiates the R&D project holds the reins for claiming tax credits, regardless of whether the work is done internally or by external contractors. This shift aims to encourage companies to take the lead on their R&D ventures and makes sure they can still reap the benefits of tax credits when they choose to collaborate with external experts.
• Interaction with Grants and Subsidies
  ERIS also redefines how grants and subsidies affect tax credits. By separating the influence of these grants and subsidies from the eligibility for tax credits, ERIS could boost the financial upside for companies investing in R&D. This is particularly crucial for SMEs that lean on grants and public funding to fuel their research efforts. They can be ensured they get the maximum benefit from available financial aids.

Simplification and Compliance for R&D Tax Credits

These updates mark a clear step towards streamlining the tax relief process and enhancing compliance to minimise misuse and mistakes. By merging two previously separate schemes, the government is looking to cut down on confusion and simplify things for businesses, making it easier to figure out what they’re entitled to claim. The increased focus on compliance aims to smooth out any disagreements with HM Revenue and Customs (HMRC). This is evident by the clearer definitions of eligible R&D activities and expenditures.

Enhanced Focus on Standards in Tax Advice

Alongside these structural changes, HMRC is increasing its focus on the quality of tax advice related to R&D claims. They’re considering measures like making membership in a professional body mandatory, working more closely with the industry, or even bringing in regulations through a government body. This approach aims to eliminate dishonest advisors and guarantee that firms get advice that is not only accurate but also ethically sound.

What Does This Mean for Businesses?

For businesses, the updated tax credit system is a mixed bag of opportunities and challenges:

Opportunities:

• Easier Access to Tax Credits
  The revamped system simplifies how tax credits can be accessed, particularly benefiting smaller businesses and those currently making losses. This change could significantly boost their capacity to fund innovative projects.
• Reduced Administrative Burden
  With clearer rules and a unified approach to the tax schemes, companies can expect a smoother process with less paperwork and fewer uncertainties. This streamlined approach should help businesses focus more on innovation and less on bureaucratic navigation.

Challenges:

• Keeping Up with Changes
  Businesses will need to stay informed about the new rules, which may require them to tweak their strategies around subcontracting and managing R&D expenditures. Keeping up-to-date will be crucial to maximise the benefits of these changes.
• Compliance and Due Diligence
  With new regulatory standards in place, companies will need to ensure that their tax advisors are fully compliant. This adds an extra layer of due diligence to the process, as getting the right advice will be more important than ever to avoid pitfalls and fully leverage the benefits of the new system.

The recent changes to the UK’s R&D tax credit system represent a significant shift towards simplifying the process for businesses and ensuring higher standards within the industry. We encourage companies to embrace these changes. Seek out quality advice and consider how these reforms can be integrated to maximise the benefits of their R&D activities.

Seeking Professional Help with R&D Tax Credits

While it’s possible to navigate the R&D Tax Credit process independently, professional advice can be invaluable. Our Innovation Term Loans or R&D Advance loans are a great way to accelerate your R&D funding.

From maximising your claim to needing simple guidance, contact us and make the most of your tax claim.