From 1 April 2024, there were further significant changes to the research and development (R&D) tax relief regime. In this article, we explore what’s changed and how it will impact innovative businesses.
The main change was a merging of the two previous regimes that applied to companies of different sizes. The intention here was to create a simplified scheme that was more understandable, fairer for the taxpayer, and less prone to abusive structures than the two-tier relief was perceived to be.
Another important change was the lowering of the ‘intensity threshold’ for an enhanced relief available to R&D-intensive businesses from 40% to 30%. This meant that more startup businesses should be able to get access to higher degrees of relief, encouraging greater innovation amongst new or developing businesses.
From a technical perspective, it is worth noting that the relief is only available to limited companies, not unincorporated businesses like sole traders or partnerships. Naturally, this will limit the pool of businesses eligible to claim, and there will certainly be R&D activity being undertaken by some of those unincorporated traders that will not get enhanced relief.
For those eligible, however, some may still struggle to navigate the complexities of quantifying and formulating a claim, as well as identifying qualifying projects in the first place. People naturally first think of R&D as being in laboratories with white coats and test tubes, but many valid claims are of a much more practical nature; there is a lot more innovation going on in our businesses than we give credit for.
HMRC’s view of R&D relief has swung from one extreme to another since its inception. Initially, many claims were rejected as not being innovative enough, resulting in a government-backed incentive that was so regularly refused that it was no incentive at all to taxpayers. The reaction, therefore, was to encourage more claims for R&D to highlight the success of the initiative, resulting in a much lighter-touch approach by HMRC.
Unfortunately, this also meant that many claims were accepted that perhaps should have been questioned in more detail, with a number of R&D boutiques and R&D departments of accountancy firms sprouting up to take advantage of the change in policy, not all of which exercising due care and attention towards the strict requirements of the relief.
Now the pendulum has swung back again and HMRC are challenging more claims than before, with even perfectly viable and valid claims coming under intense scrutiny.
Firstly, a realistic and honest sounding board for whether their project is likely to qualify for R&D relief. Claims can take an awful lot of time and effort to formulate, so a truthful opinion early on regarding what could qualify and what would not is essential in deciding whether to submit a claim.
Once a viable claim has been identified, support on the type of information needed to be collated and how it should be presented is key. A claim for R&D tax credits really should be accompanied by a detailed report setting out the objectives of the project and why it qualifies, as well as justifying the amount of claim involved.
If done properly, any HMRC investigation would likely happen in the background by a case officer reviewing the supporting information, and the HMRC challenge takes place entirely in the background without the business even knowing about it. Much better that way than having to deal with a lengthy investigation with a Revenue Inspector.
Not so much a change encouraged by the regime itself, but one notable area around the commentary at the time was the emphasis on artificial intelligence (AI) as an important development area. Previously many software-based projects have come under significant scrutiny by HMRC, so it was a refreshing change in the narrative to acknowledge that there is significant R&D work being done in areas with a less tangible output.
To find out more about the changes to the UK R&D tax regime please get in touch with our team of experts today.
