A Guide to the R&D Tax Credits Scheme in Under 5 Min

Introduction to R&D Tax Credits

The UK’s R&D Tax Credits scheme aims to incentivise businesses to invest in innovation by offering tax relief or a tax repayment for qualifying R&D activities. This scheme has undergone significant changes as of 1 April 2024, with updated rates and new rules affecting both SMEs and larger companies. These changes reflect the government's efforts to streamline the process and ensure the scheme remains competitive and accessible.

Eligibility Criteria

To qualify for R&D Tax Credits, companies must be working on projects that aim to achieve a scientific or technological advancement. This includes developing new products, processes, or services, or improving existing ones. As of 1 April 2024, the eligibility criteria remain broad, covering various industries and activities.

• SME Scheme: For companies with fewer than 500 employees and an annual turnover under €100 million or a balance sheet total under €86 million.
• RDEC Scheme: For larger companies or SMEs that have received certain grants or subsidies.

Do I Qualify?

If you run a limited company and have spent money developing new products, processes, or services—or enhancing existing ones—you may qualify for R&D Tax Credits. To make a successful claim, you should demonstrate that your project aims to advance the current state of knowledge in science or technology. This involves tackling technological uncertainties that even a team of competent professionals may not be able to resolve immediately. In fact, the more challenges, pivots, and risks involved in your project, the more robust your claim can be.

What Can I Claim?

Your claim for tax credits involves showing what you've spent on your R&D project(s). The spend that qualifies for R&D tax credits includes a proportion of the qualifying expenditure:

• Staff (e.g. salaries, expenses, NIC etc.)
• Subcontractors and freelancers
• Certain types of software
• Materials and consumables (heat, light and power used during the R&D project)

Updated Rates

The rates for R&D Tax Credits have been revised, here’s where we are now:

• SME Scheme: The rate of relief for SMEs has been reduced to an effective rate of 18.6% for loss-making companies
• RDEC Scheme: The rate for the RDEC scheme has increased to an effective rate of 15%
• R&D Intensive rates: If 40% of your total expenditure is spent on R&D, and you are loss-making, you’ll be able to obtain a rate of 26.97%

As of 1 April 2024:

• Both the SME and RDEC Scheme are now the Merged Scheme, the effective rate being 16.2% if your startup is loss-making
• R&D Intensive rates: If 30% of your total expenditure is spent on R&D, and you are loss-making, you’ll be able to obtain a rate of 26.97%

Here’s some Actionable Tips:

• Recalculate your R&D claims based on the new rates.
  • Adjust your financial forecasts to account for the changes in relief.

The Merged Scheme

A significant update to the R&D Tax Credits scheme is the introduction of a merged scheme, consolidating the previous SME and RDEC schemes. This unified approach simplifies the application process, making it easier for businesses to navigate the requirements. The merged scheme also aims to provide a more consistent level of support across different business sizes and sectors.

This integration will streamline the process and reduce administrative burdens for companies, making it easier to claim relief.

Notification Form and Additional Information Form

Starting from 1 April 2024, businesses must submit a “Notification Form” to HMRC within six months of the end of their accounting period to declare their intention to claim R&D Tax Credits. This new requirement helps HMRC manage the increasing number of claims and ensure timely processing.

Additionally, an "Additional Information Form" must be submitted alongside the R&D claim. This form requires more detailed documentation of the R&D projects, including technical details and cost breakdowns.

• Actionable Tips:
  • Set reminders to submit the notification form promptly.
  • Prepare detailed documentation to support your R&D claim.

Overseas Expenditure Rules

New rules concerning overseas expenditures come into effect on 1 April 2024. Under these rules, only R&D activities conducted within the UK are eligible for tax relief, with limited exceptions for specific scenarios, such as when the skills or facilities required are not available in the UK.

This change aims to encourage businesses to carry out their R&D activities domestically, supporting local talent and infrastructure.

• Actionable Tips:
  • Review and adjust your R&D activities to align with the new rules.
  • Identify any overseas expenditures that may no longer qualify and plan accordingly.

Conclusion

The recent updates to the UK’s R&D Tax Credits scheme, effective from 1 April 2024, bring significant changes to the relief rates, application process, and eligibility rules. Businesses must understand these updates to their benefits and ensure compliance.