A Q&A on the R&D Tax Relief Scheme

It’s not news that R&D tax relief has become nothing short of a minefield in the world of government funding. With refreshed legislation, tax credit changes and updated schemes, understanding whether you are eligible to claim R&D tax relief and how much you could potentially claim has become confusing to say the least.

We talked with Managing Director of Novus Capital, Jenson Brook, and Senior Advisor to Novus Capital on R&D tax-related matters Jonathan Yeomans, who answered some of our important questions that SMEs and startups may have.

Question

As a startup or an SME, should you be worried about the R&D tax credit changes? How have they affected other businesses and what can you expect if you file for research and development tax relief?

Answer

There have been several changes to the R&D tax scheme over the last couple of years, and while these can seem daunting and challenging to keep up with, some of these changes may actually benefit your business. Key recent changes have included:

From 1 April 2023:

• Allowable R&D costs were expanded — Cloud computing, data licences, and mathematical advances have been made allowable where these are related to R&D. This broadens the scope of expenditure that can qualify for relief.
• Pre-notification requirement — Some companies (generally those who haven’t claimed in the past three years) must now pre-notify HMRC of their intention to claim R&D relief, applicable to accounting periods beginning on or after this date.
• The Research and Development Expenditure Credit (RDEC) rate has been increased from 13% to 20%.
• The rate for SME R&D tax relief was reduced from 130% to 86%, and the SME payable credit rate from 14.5% to 10%. However, a new R&D intensive SME credit has been introduced at a 14.5% rate for companies where 40% or more of their total expenditure is on R&D, providing targeted support for high-R&D businesses.
• A new Additional Information Form (AIF) was introduced for all R&D claims made from 8 August 2023.

From 1 April 2024:

• New merged R&D scheme introduced — From 2024, a unified scheme for all companies will be introduced with a 20% RDEC rate. Under this merged scheme, the complications around grant funding that previously reduced the benefit under the SME scheme will no longer be relevant, as all R&D claims will follow the same rules.
• New R&D intensive SME criteria — The threshold for qualifying as an R&D intensive SME will be reduced to 30% of expenditure, making it easier for more companies to qualify.
• Overseas R&D restrictions — Restrictions on overseas R&D will take effect for subcontractor and Externally Provided Workers (or EPW) costs, meaning that companies need to ensure more of their R&D activities are conducted within the UK in order for that expenditure to qualify for relief, subject to some exceptions.

While these changes reflect an evolving landscape, they also bring opportunities, especially for businesses heavily invested in R&D. No further major changes are currently planned.

If you are considering filing for R&D tax relief, it’s crucial to stay informed to ensure you correctly follow the new rules and maximise your claim.

Question

What advice would you give to startups and small businesses who are thinking about filing for R&D tax relief?

Answer

For startups and small businesses considering filing for R&D tax relief, here’s some advice to help you navigate the process effectively:

Understand what qualifies

Make sure you clearly understand what activities and costs qualify as R&D. Building a website or a new app is unlikely to involve R&D tax qualifying activities. You need to be advancing the overall field of science and technology by resolving an existing scientific or technological uncertainty. This means that standard or routine activities are not qualifying.

Keep detailed records

Accurate and thorough documentation is crucial. Keep detailed records of your R&D activities, including project descriptions, timelines, costs, and the uncertainties you aimed to address. This will make your claim much smoother and more robust in case of any HMRC enquiries.

Consider taking professional advice

The rules surrounding R&D tax relief can be complex, especially with recent changes such as the Additional Information Form (AIF) requirements. Consulting with a specialist can help ensure you’re maximising your claim and staying compliant with HMRC’s requirements. They can also assist in identifying qualifying activities and expenditures.

Stay informed about changes

The R&D tax relief scheme has undergone several changes recently, including adjustments to qualifying costs, rates, and requirements for pre-notification. Stay informed about these updates to ensure your claim reflects the current rules.

Don’t delay

R&D tax relief can provide a significant financial boost, particularly for startups and small businesses. Don’t delay in filing your claim, as the relief could help fund further innovation and growth in your business.

Additionally, if you’re a new business or haven’t claimed R&D tax relief in the past three years, you now need to pre-notify HMRC of your intent to claim. This pre-notification must be submitted within six months after the end of the accounting period in which you plan to make your claim. Missing this deadline could result in your claim being rejected, so it’s crucial to act promptly and ensure you meet all required deadlines.

Filing for R&D tax relief is an excellent way to support your innovation efforts if you meet the qualifying guidelines. With careful planning, detailed documentation, and the support of a specialist where needed, you can maximise your benefits while staying compliant with HMRC’s requirements.

Question

What can small businesses do to survive while waiting for their R&D claim to be paid?

Answer

Small businesses often face cash flow challenges while waiting for their R&D tax relief claim to be processed by HMRC. Here are some steps you can take to manage this period effectively.

Understand HMRC’s payment timeline

HMRC aspires to pay out 85% of SME payable tax credits within 40 days of receiving a claim or to contact you within that period if there are any issues. This is explained in CIRD80525. However, this is only an aspiration, and it sometimes takes longer. A two-month wait is not uncommon, particularly during periods of high claim volumes.

Plan for potential delays

Given that the process can extend beyond the 40-day target, it’s important to factor potential delays into your cash flow planning. If HMRC has concerns about the accuracy of your claim, they may open an enquiry, which can further delay payment.

Ensure your claim is accurate and complete

To minimise delays, make sure your claim is accurate, filed electronically using the Additional Information Form (AIF), and includes the correct bank account details. An incomplete or incorrect claim can lead to unnecessary hold-ups in the payment process.

Stay in contact with HMRC

If there is a longer delay in pay-out with no explanation, you can contact HMRC to ensure your claim is progressing and ensure there are no issues. If you are using an adviser, they will usually contact HMRC on your behalf to find out if there are any issues.

Don’t rely on R&D payment for funding

It’s risky to rely solely on an expected R&D tax credit payment for funding. These payments are not guaranteed and can be delayed or reduced if HMRC raises queries or opens an enquiry. Always have alternative funding options in place to maintain your business’s stability.

Prepare for possible enquiries

HMRC sometimes opens an enquiry before making a payment, but enquiries can also happen after a payout has been made. The window for HMRC to open an enquiry is typically 12 months from the filing of the claim. Ensuring your claim is robust, well-documented and accurate can help mitigate any risks in case of enquiry.

By understanding HMRC’s processes, avoiding over-reliance on R&D payments, and preparing for potential delays, you can better manage your business’s cash flow while waiting for your R&D tax relief to be processed.

Question

Are there likely to be further changes with the new government in place?

Answer

No major new changes to the current R&D tax relief scheme are expected in the short term with the new Labour government in place. All signals and rumours suggest a continuation of the current policy design. Before the general election, in February 2024, Labour released a Business Partnership for Growth prospectus, where they pledged to maintain the existing R&D tax credit structure throughout the next parliament.

They acknowledged, “There has been far too much chopping and changing in recent years, with five changes this parliament alone. To provide stability, Labour will maintain the current structure of R&D tax credits over the next parliament, while cracking down on fraudulent claims and those made in error.”

The previous Tory chancellor, Jeremy Hunt, had also already announced in the 2023 Autumn Statement that the Treasury was ending its review into R&D tax reliefs, concluding a busy two-year evaluation of the UK’s R&D incentives that led to many of the changes that have since been implemented. The Treasury had by that time concluded that the current R&D relief scheme was ‘fit for purpose’, although they hinted at further work on tackling non-compliance.

Whilst we can expect a continued focus from HMRC on compliance, the core structure of the scheme is likely to remain stable. Ongoing consultations on ‘Raising standards in the tax advice market’ and ‘The Tax Administration Framework Review’ may eventually impact how the R&D scheme is administered and policed, particularly concerning enquiries and the potential regulation of advisors, but will not necessarily affect the underlying scheme.

Additionally, any significant changes from these consultations are not expected to materialise for a couple of years.

We’ll wait to see if Rachel Reeves continues this approach in the forthcoming budget on 30 October 2024, but all indications point towards R&D policy remaining most likely unchanged in the short term.

Novus offers the solutions to all of your funding needs. Taking a full-service funding approach, the Novus team works by securing government funding which lays a solid foundation to access additional funding opportunities. They specialise in government funding such as R&D tax relief, innovation grants alongside equity and debt financing.