If you spend money developing new products, processes or services; or enhancing existing ones, you might be eligible for R&D tax relief.
But how will the scheme change in April 2024?
There are currently two separate schemes, the Research and Development Expenditure Credit (RDEC) and the R&D SME scheme, both which offer incentives to businesses.
For example, under the RDEC, larger businesses can claim an expenditure credit to offset your Corporation Tax bill for working on R&D projects whilst, under the R&D SME scheme, deduct an extra 86 per cent of their qualifying costs from your yearly profit, as well as the normal 100 per cent deduction, which makes a combined deduction total of 186 per cent.
Incentives from these schemes can help to significantly reduce your Corporation Tax liabilities and range from support that covers the costs of research & development to relief on losses your business might make during a project.
HMRC previously revealed the UK claimed a significant £204 billion in total relief for the 2022/23 tax year.
With the Government’s announcement that the two schemes will now be merged, it is important you understand how it will affect you from 1 April.
The new scheme will combine the current incentive for SMEs with the research and development expenditure credit (RDEC) which is aimed at larger businesses.
The scheme will ultimately mean your SME will receive a reduced benefit due to the Government’s goal to ‘rebalance’ the different rates available, to tackle wastage and increase profitable R&D activity.
From 1 April 2024, SMEs will now be considered R&D intensive if your qualifying R&D spending makes up at least 30 per cent of their total expenditure during their financial year.
If you are an R&D-intensive SME, however, you can still claim a tax credit at a higher rate of 14.5 per cent.
If you are unsure of the new R&D tax relief scheme, or want clarification as to how it will affect your business, seek the advice of an expert accountant and get in touch today.
Although there will be the introduction of a merged R&D scheme from 1 April, there will also be two separate incentive schemes put in place, with the continuation of the enhanced rate for R&D-intensive SMEs operating under the current SME model.
The R&D-intensive scheme will only apply to loss making SMEs that have spent a set proportion of their total business expenditure on R&D.
As announced in the Autumn Statement 2023, the qualifying threshold was reduced from 40 per cent to 30 per cent of a business’s total expenditure.
This new legislation now enables more loss making SMEs to qualify as R&D-intensive and will grant you access to more financial relief which will benefit your growth and development.
Although the 10 per cent threshold decrease is beneficial, it does mean that if you are a business that has invested a quarter of your overall expenditure into R&D then you will not be considered R&D-intensive.
The RDEC structure has been chosen for the new R&D scheme however, if you are a RDEC claimant and do not understand the changes, your business might be disrupted.
The Government have stressed their intention of increasing the overall level of R&D investment.
This will be done by reducing the cost of investing in R&D – as a result of this, only the R&D decision maker, in the process, will be awarded the relief.
The reformed policy will also allow most businesses to outsource their R&D activities to claim tax relief for any costs associated with these actions.
Currently, businesses that conduct R&D activities on behalf of a larger business can usually claim under RDEC.
However, with the new changes, you will not be considered the R&D decision maker and will not be able to make a claim if your contractor can.
Only the large business contractor should receive a boost to the value of their claim.
With the new changes comes new responsibility to understand the complexities that surround its framework.
If you are under-prepared, and do not know the new R&D scheme by 1 April, your eligibility, value, and claim process might be affected.
Our team of expert professionals will ensure you know the ins and outs of the new R&D tax relief scheme, and understand how you can use the changes to impact your business.
If you would like to discuss the new R&D tax relief scheme and how your business can benefit from it, contact us now.
