Which businesses are impacted by changes to the R&D tax regime?

For companies with accounting periods beginning on or after 1 April 2024, a number of significant changes have come into effect in relation to research and development (R&D) tax relief claims. There will be winners and losers here, but the key point is that these changes will impact every business making R&D claims, and so it is important to consider these as early as possible. 

• Two regimes become one (but not quite) – the current SME (small & medium sized enterprise) and RDEC (R&D expenditure credit) regimes will be combined to form a merged regime, with relief given in the form of an ‘above the line’ expenditure credit of 20%. The credit is taxable, resulting in a net benefit to claimants of between 15-16% (depending on whether the company is profitable or loss making). 
  
  A level of complexity is still retained though, with a separate regime kept in place for loss making R&D intensive SMEs. This maintains the same mechanics as the existing SME R&D tax relief regime and offers a net tax benefit of 27%. To be ‘R&D intensive’, an SME’s qualifying R&D expenditure must be 40% or more of its total expenditure (this reduces to 30% for periods beginning on or after 1 April 2024). 

• Changes to eligible overseas expenditure - companies that subcontract R&D activity to a third-party will only be able to claim relief if that activity is performed in the UK. Where companies incur expenditure on payments for externally provided workers, they will only be able to claim relief where those workers are paid through a UK payroll. Exceptions exist for situations where it is wholly unreasonable to undertake the activities in the UK. However, this laudable policy intention of encouraging more R&D to be undertaken in the UK is likely to impact many businesses in the short term, given how long it takes to change established international supply chains. 

• Subsidised and subcontracted expenditure – existing restrictions on subsidised expenditure (eg grant funded, or customer subsidised R&D) under the SME regime have been removed entirely. Under the new subcontracting rules, relief is now available to the company that takes the decision to undertake R&D (bearing the risk for this). Both these changes apply to all companies under the merged regime, removing historic restrictions in place. 

• Cap to payable credits – whilst a cap on the amount of payable credit a company can receive remains, this will be applied based on the more generous definition from the SME regime. Businesses with low payroll bills (relying instead on external resource) must continue to exercise caution here. In broad terms, these changes will favour large companies, who will benefit from the ability to claim for subcontracted expenditure for the first time, if the required conditions are met. Conversely, SMEs will see a reduction in the effective rate of relief available (although this doesn’t apply to those few companies eligible for the SME intensive rate). 

Claimants of all sizes that rely on R&D activity carried out overseas will need to carefully review the new guidance to assess the impact on their future claims.

Overall, these remain uncertain times for businesses reliant on UK R&D tax incentives to support future investment. Whilst the policy intention to encourage UK based R&D is clear, there is concern that not enough focus is being directed towards the SME community. Early consideration of the new rules is crucial to ensure that businesses understand the impact of these changes on their future cash flow.