What Are the Changes to the R&D Tax Credits Scheme and How Might They Affect SMEs in the UK?

Lily Ruaah, 17 October 2024

The UK is a hive of innovation, with businesses in almost every sector pushing their boundaries and finding new and exciting ways to grow their industry. The UK government introduced Research & Development (R&D) tax credits to encourage and reward companies that are innovating.

However, recent changes to the scheme have caused a number of challenges for businesses. Many are unsure whether their activities are still eligible, or are concerned about working with R&D tax relief consultancies that are not operating above board, putting the company at risk of investigation from HMRC.

We spoke to Ailsa Lynch, Innovation Funding Manager at Novus Capital and R&D expert, to give us an insight into the changes and what it could mean for your business.

What are R&D tax credits?

Originally introduced in 2000 for small and medium-sized businesses in the UK and later extended to large companies in 2002, R&D tax credits represent a government initiative aimed at encouraging businesses to increase their investments in research and development endeavours. This programme enables profitable companies to reduce their tax liability, while unprofitable ones can receive cash credits as a portion of their R&D expenditures.

Presently, there are two distinct avenues for obtaining these incentives:

In both cases, ‘research and development’ is defined as a scientific and technological project that either creates a new process, product, or service, or enhances an existing one.

What is an SME?

SME stands for Small and Medium-sized Enterprises, and are businesses that fall within a specific range of size and annual turnover. These enterprises play a crucial role in the UK economy and encompass almost every industry and sector you can think of.

In order for a business to be qualifying for SME R&D tax relief, it must meet the following criteria:

How has the R&D tax credits scheme changed?

The government announced a number of changes to their tax and spending plans in both the 2023 Spring Budget and the 2023 Autumn Statement.

Merger of R&D tax reliefs

Currently, there are two separate schemes for R&D tax reliefs: RDEC (Research and Development Expenditure Credit) and SME scheme.

From 1 April 2024, these two will merge into one scheme
This merger aims to simplify the tax process by having one set of rules and making the tax credit more visible
For companies making losses, the tax rate applied in this new scheme will be reduced from 25% to 19%
Changes to the qualifying expenditure categories

Additional tax-relief for R&D intensive loss-making SMEs

There’s additional tax relief for SMEs that are heavily involved in R&D and are making losses.

The requirement for how much a company must spend on R&D to qualify for this relief is being reduced from 40% to 30% of their total expenditure
This change means around 5,000 more SMEs will be eligible for this relief
If a company's R&D spending falls below 30%, they'll still receive this relief for one more year

Removing nominations and voiding assignments for R&D tax reliefs

From 1 April 2024, companies can no longer nominate a third party to receive their R&D tax credit payments, with a few exceptions. Also, from 22 November 2023, companies can’t assign their R&D tax credits to others.

This means R&D tax relief payments will go directly to the company that made the claim, aiming for more efficient and direct payment processing.

Closing the R&D review

The government has been reviewing the R&D tax relief schemes since the Spring Budget 2021. This review aimed to ensure the UK remains attractive for advanced research and that these tax reliefs are still appropriate—it concluded with the announcement of the merged R&D tax relief scheme.

HMRC plans to publish a plan to tackle non-compliance in R&D tax reliefs. The government will keep working with industries to improve support for SMEs heavily involved in R&D and may consider further simplifications in the future.

Other changes

In addition to these R&D tax relief-specific changes, there were also changes in the Spring 2023 and Autumn 2022 budget which were relevant to innovative businesses, such as the return of a main rate and small profits rate of Corporation Tax. These both have implications for both SME and RDEC companies, with many now paying higher rates of tax than previously, diminishing their profits.

These changes are now in place for any expenditures that take place after 1st April 2023. As the scheme works retrospectively, most current R&D claims for the last accounting period will continue to benefit from the more generous rates.

Find out more in the Autumn Statement 2023.

Why are these changes being made to R&D tax relief and how will this affect SMEs?

The reformation of the R&D tax relief scheme is to help ensure that public money is being spent effectively and helping to drive forward innovation in the UK. After it came to light that a number of R&D tax relief claims had been made fraudulently, the government chose these new measures as a way to crack down on this continuing.

While some of these measures may not be beneficial for everyone, the changes still provides an incentive for innovation.

Should my company still claim R&D tax credits?

While the recent changes to the R&D tax credit scheme represent a significant shift in how SMEs can access valuable incentives for their innovation and research activities, it’s important to remember that these changes are aimed at promoting greater financial support for businesses that truly need it.

With innovation playing a pivotal role in the UK’s economic growth, SMEs should not consider these changes as a reason to be discouraged, but rather embrace them as opportunities to thrive and contribute to a more innovative and competitive business landscape.

If you want to find out more about the SME landscape in the UK, the Beauhurst platform has everything you need. With our unique combination of machine learning models, data extraction, and 60+ data analysts, the information we provide is unrivalled in the UK market. To find out more, book a demo today or get in touch with our friendly team.