Understanding and benefiting from Research & Development (R&D) tax credits can be crucial for businesses, especially with recent updates and increased scrutiny from the government and its agencies.

In January 2024, the National Audit Office (NAO) published a report highlighting widespread errors and fraud, and shortcomings in HMRC’s processes for R&D tax credits, prompting significant changes. Additionally, the Chancellor’s Autumn Statement in November 2023 outlined structural modifications to the relief offered. Here is a breakdown of the things you need to know.

Changes to R&D Tax Relief Schemes

For accounting periods commencing on or after April 1^st 2024, there will be a unified rate of tax relief applicable to most R&D activities, known as the Merged Scheme – Research and Development Expenditure Credit (RDEC). While this means a reduction in tax relief for SMEs, the RDEC rate is increasing from 13% to 20%, providing a benefit of 15% to 16.2% of qualifying R&D expenditure after tax. An exception is made for SMEs engaged in what is referred to as ‘intensive’ R&D, offering a more generous benefit of up to 26.97%.

It’s important to note that there have been no alterations to what qualifies as R&D.

Further technical changes

The following technical changes also take effect for accounting periods commencing on or after 1^st April 2024:

Subcontracted R&D: The contracting company can now claim tax relief for subcontracted work, whereas previously only the subcontractor could claim under the SME scheme. There will be more scrutiny on who the R&D decision maker is and whether the R&D was “intended and contemplated”.
Handling of Subsidised Expenditure: SMEs will now benefit from a more generous treatment of subsidised expenditure (for example, grant funding), with tax relief no longer reduced.
Focus on UK Activities: R&D relief is now refocused on UK activities, with certain exceptions, and Externally Provided Workers (EPW) costs are eligible only if subject to UK PAYE and NIC.

Understanding procedural and compliance changes

The National Audit Office has reported that the level of risk and compliance work necessary for R&D relief was underestimated by HMRC for years. This has resulted in a level of error and fraud estimated to be as much as 28% of claim values across both schemes. This would represent £1.13 billion in the 2020-21 tax year alone.

As you can imagine, HMRC are tightening up – and rightly so. The number of staff working on risk-based compliance increased by 230% in 2023, jumping from 88 to 289. The number of cases they opened rose by 627%. They have also given themselves more time to assess claims – a previous KPI of handling 95% of claims within 28 days has now been set to 85% of claims within 40 days.

Some rogue agents have been highlighted as fuelling the error and fraud. Since August 2023 there has been an obligation on claiming companies to disclose the details of any agents involved in a claim and report suspicious behaviour.

There are two procedural processes of note that were both introduced in 2023:

Advanced notification – This requires you to pre-notify HMRC of an intention to claim R&D tax relief if you are making your first claim, or if you have not made a claim for more than three years.
Additional information form – Since August 2023 it has been mandatory to complete an additional information form with every application for R&D tax relief.

The importance of choosing a reliable R&D tax credit adviser

Given the numerous changes in R&D tax relief over the past year, the considerably more stringent compliance environment and coupled with the presence of some unreliable R&D advisers in the market, it has never been more critical to select a dependable R&D tax credit adviser.

At Tectona, we believe that the best service that we can give our clients in this area is to introduce them to someone we know will give them support where they need it most.

We work alongside Kene Partners to deliver an award-winning R&D tax relief advisory service. With their established relationships at HMRC, a team of technical experts and a strong emphasis on client service, Kene Partners are ideally positioned to help you successfully claim R&D tax relief.

Tectona comment:

“Kene Partners: The right team, the right expertise to deliver the right solution, on time, every time.”

From assisting you in selecting the appropriate scheme* to identifying all qualifying activities and costs for an accurate claim, they’ll be with you every step of the way.

The benefit of this partnering relationship is that you can access a fast-track assessment of your potential to claim R&D.

Find out what your claim could be worth.

To book your free consultation, visit Kene Partners.

* And this is where it can get complicated – you will need to select the appropriate scheme because if you have made claims previously you could be running claims under a number of legacy schemes as well as the current Merged/High Intensity Schemes.

About Tectona

Tectona Partnership helps business owners sleep at night by embedding one of our 18 commercially minded finance directors in your management team.

Very often, a part time (or fractional) finance director is the most effective solution.

We make sure you have the necessary management information and strategic insight to make informed decisions and reduce risk; and we will absolutely tell you what you need to know, when you need to know it.