The new 2024 R&D scheme changes and what they mean for your business

Big changes happened to R&D tax relief: What you need to know

In Spring Budget 2021, the government began a review of R&D tax reliefs with the aim to have the UK remain a competitive location for cutting edge research. If your company does research and development (R&D), you've probably noticed that the tax rules have been changing a lot. The government's reasonings for these changes was to make the claimant processes easier and to cut down on mistakes and fraud. From 1 April 2024, the two previous R&D tax relief schemes have merged into one. Here's a simple guide to what this means for your business.

Previous R&D tax relief schemes

Previously, there were two main schemes for R&D tax relief:

• SME scheme: This was for small to medium-sized enterprises (SMEs) and offered generous tax relief.
• R&D expenditure credit (RDEC) scheme: This was for large companies and some SMEs that get subsidies or are subcontractors.

What's changed?

The new merged scheme looks a lot like the RDEC scheme. Here are the main similarities:

• The new scheme will use a seven-step process similar to RDEC.
• The tax credit will be included in your taxable income, which is a new thing for SMEs.
• Unlike the previous SME scheme, getting a subsidy or grant won't reduce your R&D tax relief.

The key differences from the RDEC scheme:

• The new scheme uses the simpler and more favourable PAYE & National Insurance contributions cap, meaning fewer businesses will need to consider whether they are at risk of hitting it.
• The rules will be more flexible, allowing more claims for outsourced R&D, similar to the previous SME scheme.
• The focus will be on the company that decides to do the R&D and bears the risk, which might limit claims for SMEs working as subcontractors.

How will you benefit?

Larger companies:

• They'll like the new, simplified rules and the favourable PAYE/NIC cap.
• The merged scheme builds on the existing RDEC scheme with some added benefits from the SME scheme.

SMEs:

• Some might get less relief due to the alignment with the RDEC rules. This was to be expected as HMRC's findings showed smaller claims being more likely to be affected by error and fraud.
• However, R&D-heavy SMEs can still get up to 27p in tax credits for every £1 spent on R&D if they are losing money and meet certain spending thresholds.
• The new scheme will make it easier to predict tax relief and plan budgets.

Summary

Effective from 1 April 2024 the new merged R&D tax scheme aims to standardise and streamline. While the changes bring several advantages, they also present some challenges. Here's a summary of the pros and cons:

Pros:

• Simpler process: Having one scheme instead of two aims to make things easier.
• Easier calculations: The new PAYE/NIC cap is simpler and beneficial for large companies.
• More flexibility: Better rules for claiming subcontracted R&D costs.

Cons:

• Complex for small businesses: The new seven-step process might be complicated for smaller SMEs.
• Less relief for SMEs: Some SMEs might get less tax relief.
• Limited claims for some SMEs: SMEs working as subcontractors might not be able to claim under the new rules.