R&D Tax Relief a reminder of the recent changes

There have been many changes lately surrounding this corporation tax relief and below we have summarised the updates to this tax relief that are likely to have the greatest impact on companies.

The new merged R&D scheme

For accounting periods beginning on or after 1 April 2024, the vast majority of R&D claims will be done through the new merged scheme. In short, companies who incur qualifying R&D expenditure will receive a 20% credit based on their total expenditure. This credit will be subject to corporation tax (main rate of 25%), which gives an effective rate of relief of 15%.

Companies that fell within the definition of an SME would previously claim under the small company scheme, where the effective rate of tax relief was 21.5%. Large companies would have claimed under the RDEC scheme where the effective rate of relief was 15%. So overall the tax relief available to most companies who make R&D relief claims has gone down. However, R&D intensive companies (defined as those that incur 30% of total expenditure on R&D expenditure) can still possibly benefit from the more favourable historic SME scheme rates.

R&D qualifying expenditure – overseas costs

Another significant change is that for accounting periods beginning on or after 1 April 2024, costs incurred on overseas expenditure will no longer be eligible for R&D relief. This is going to impact payments made to overseas subcontractors and externally provided workers.

There is an exception to this rule which covers situations where the R&D has to be performed overseas due to geographical or environmental conditions that do not allow the R&D to be undertaken in the UK. It must also be the case that the required conditions could not be replicated in the UK.

R&D costs

Previously companies who claimed under the RDEC scheme were not eligible to claim R&D tax relief on subcontractor fees. However, these costs will be allowable for claims made under the new merged scheme. It is also worth remembering that from April 2023, R&D qualifying expenditure expanded to include costs for cloud computing, data costs and pure mathematics that are associated with R&D work.

Relief for subcontractors

It is worth noting that under the new merged scheme companies that have R&D subcontracted to them from a third party will not be able to claim R&D relief. There are some exceptions to this which cover when the R&D was subcontracted by a contracting body that is not subject to tax such as a government department.

As you can see there have been many changes associated with R&D tax relief and if you have any questions on this please get in touch with Joe Wilson on 023 8046 1237 or email Joe Wilson.