What are R&D tax credits?
Research & Development (R&D) tax credits are a valuable tax incentive from HMRC, aimed at encouraging innovation and technological advancement among UK businesses.
Starting April 1st 2024, the SME and RDEC (Research & Development Expenditure Credit) schemes converged into a single, unified scheme.
The surge in R&D tax relief claims in recent years served as the catalyst for the new scheme, paired with an HMRC crackdown on erroneous and fraudulent submissions, which have risen exponentially.
For example, the rate of error and fraud within the two schemes reached 16.7% in the 2020/21 period, which translated to a £1.13 billion loss, presenting a stark rise from the previously estimated 3.6% for erroneous and fraudulent applications.
Although recent adjustments have been made to the claimable amount, this incentive continues to support companies engaging in pioneering R&D work within their respective fields.
How did the R&D tax credit schemes change before April 1st 2024?
In an effort to streamline the R&D tax relief process and enhance accountability, HMRC unveiled new mandatory reporting requirements in July 2023.
As of August 8, 2023, businesses have been required to submit an ‘Additional Information Form (AIF)’ digitally to HMRC prior to filing their tax return.
Failure to submit this form results in automatic rejection of the claim, emphasising the responsibility businesses have in ensuring their R&D tax relief claims are correctly managed.
A crucial realisation for many small businesses is that the ultimate responsibility for the R&D tax relief claim rests with them, not the accountants or R&D tax advisors who assist in the claim process.
What has changed in the way businesses can apply for R&D tax credits in 2024?
This new structure kicked in for accounting periods that begun on or after April 1st, 2024, and will operate at the existing RDEC rate of 20 percent.
This rate effectively translates to a net corporation tax relief of 15 percent on eligible R&D spending (£15 relief for every £100 of expenditure).
For SMEs heavily invested in R&D – specifically, those dedicating at least 40 percent of their total expenditures to eligible R&D activities – the new scheme offers a lifeline.
Loss-making SMEs, before accounting for any R&D tax relief, can claim an enhanced tax relief at 86 percent and surrender losses for a tax credit at 14.5 percent, up to a maximum benefit of £26.97 for every £100 spent on qualifying R&D activities.
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