Innovation Tax update: Single merged R&D tax incentive scheme

The 2023 Autumn Statement announced the merging of the RDEC (‘Research and Development Expenditure Credit’) and SME schemes into a single R&D tax incentive scheme.

This new single scheme, now enacted in Finance Act 2024, largely follows the same principle as the current RDEC scheme and will take effect for accounting periods that commence on or after 1 April 2024. Under this new single scheme, regardless of size, all companies will receive an above the line credit. This credit is recognised in pre-tax profits in the company’s financial statements and is itself subject to corporation tax.

Those currently claiming under the SME scheme will see the largest decline in benefit. To provide a brief overview of the impact of the change in rates, we have set out below possible scenarios depending upon whether a company is profitable or not:

  • A profitable company currently claiming under the SME scheme can enhance their tax deduction on their eligible R&D expenditure by 86%, so a company with £100 of R&D expenditure could claim a tax deduction of £186 from their taxable profits. At a tax rate of 25%, the net cash benefit would be worth £21.50.
  • Under the new merged scheme, instead of an enhanced deduction, the company will receive a simple 20% tax credit which, at a 25% tax rate, will provide a net cash benefit of £15 for every £100 of eligible R&D expenditure.
  • For loss-making companies, the notional tax rate applied to the R&D credit will be the small profits rate of 19% resulting in a net cash benefit of £16.20 for every £100 of qualifying expenditure.

However, there is an exception to this. Despite being launched to simplify the R&D tax relief process, there is still a second scheme for SMEs who are loss-making and R&D intensive if the conditions are met.

Eligible companies will receive an 86% enhanced deduction on their qualifying R&D expenditure and will be able to claim a repayable tax credit of 14.5% (currently only 10%).

Alongside the change in rates, HMRC have also introduced new rules which will have a significant impact on future claims, as well as new filing requirements such as the Additional Information Form and Notification Form. On top of this, HMRC have placed great focus on R&D claims over the last 12 months, with reports that they are enquiring into every 1 in 5 claims. However, HMRC’s approach has been questioned by the leading professional bodies, including the ICAEW and CIOT, for being unfair and unreasonable.

Therefore, seeking the right advice is more important now than ever. We have a team with extensive experience in this area as well as the full innovation lifecycle, from grant funding and IARs to Patent Box tax reliefs.

In the year ended 30 April 2024, Hazlewoods’ Innovation team assisted their clients with the preparation and completion of R&D and Patent Box tax relief claims worth over £10.3 million in tax savings and credits.

Please get in touch if you would like to discuss how we can help your business.

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