Major changes to R&D Tax Scheme

April 2, 2024 Major changes to R&D Tax Scheme

The biggest shake-up to the R&D tax scheme since its inception is now established in law. Most changes will apply from accounting periods starting on or after 1 April 2024. They can be summarised as follows:

Merged R&D Rules (New RDEC Scheme)

• The determination of whether work meets the definition to be eligible R&D has not changed.
• Under the new merged scheme, most claimants will gain relief as an above-the-line credit on the same activities as the existing schemes.
• Where R&D is contracted out, the merged scheme moves from rewarding companies undertaking R&D activities to also rewarding those “contemplating” R&D i.e. those planning, initiating, and funding it,

R&D Intensive SME Scheme

• For expenditure incurred on or after 1 April 2023: Loss-making SMEs with an R&D intensity of 40% or higher (based on expenditure over the latest 12 months of accounts) can claim an R&D tax credit at 14.5% instead of the standard 10%. This will mean the maximum rate claimable will be 27% (186% *14.5%) compared to 18.6% (186% *10%) for non-R&D intensive spend.
• For accounting periods beginning on or after 1 April 2024 – the same rate of relief applies, but the R&D intensity is reduced to 30% from 40%.
• The calculation of R&D intensity includes connected companies and any R&D expenditure that has been capitalised as intangible fixed assets on the balance sheet.
• Claimants that decide to claim under the intensive scheme will need to prove their SME status as well as their R&D intensity.
• The removal of the restrictions on subsidised expenditure may enable lossmaking companies in R&D intensive industries that have received grants to claim tax credits under the R&D intensive scheme.

Overseas Subcontracting and Externally Provided Workers (EPWs)

Most of the expenditure incurred on contracting out R&D to subcontractors and the use of the overseas EPWs will not be claimable in future, unless it meets strict criteria:

1. To claim for the cost of an overseas subcontractor or EPW, a company will need to show that the work needed to be done overseas because it would be wholly unreasonable to replicate conditions in the UK due to geographical, environmental, and social factors, and legal or regulatory requirements.
2. Cost of workers will not be acceptable as meeting the criteria necessary to claim overseas subcontractors or EPWs.