25th Mar 2024

2024 R&D changes you need to be aware of

Stephanie Earrye picture

Stephanie Earrye

Tax Accountant

Nicole and Steph have kindly put together some useful information to help you navigate 2024 R&D changes.

Here’s the second of our promised supplements to our Budget summary.

R&D received a brief mention in the budget, but there’s lots going on outside of the budget framework so now is a great time to bring you up to date.

2024 R&D defined

First, an important reminder that R&D – research and development in the world of tax doesn’t meet quite the same definition as many of you may think in the English language.

R&D tax credits only apply to (mainly) direct costs associated with research where the company is involved in scientific or technological innovation.

That’s not about you learning something that’s new to you but already out there, and it’s not market research. It’s about testing advancement – looking to do something better than everyone else in your field.  Sometimes this fails, but it can still be R&D.

Tackling false claims

Next, HMRC have woken up and smelt the coffee where spurious claims are involved. There have been some incredible stories in the past about some claims that have passed, but HMRC have now roped in a substantial number of extra inspectors.

The extra inspectors are aiming to scrutinise around 25% of claims (we believe around 1-2% were inspected back in 2020).  This has led to market-wide delays in both scrutiny and pay-outs, with, we assume, several claims rejected.

Focus on software development claims

We have heard that HMRC are focussing on software development claims as it is difficult to prove technology has been advanced in this area.

As with all tax returns, HMRC can investigate a CT return that contains and R&D claim within 12 months of it being submitted. If they find or suspect any error, they can make enquiries about previous year’s tax returns. They can investigate anywhere from 2-20 years depending on the circumstances.

Impact on R&D claims

To bring into context the impact this is having on the market, earlier this month we saw one of the biggest ‘specialist’ R&D claim providers, RDI Solutions, close its doors completely and very suddenly, leaving a number of clients and accountants hanging.

The lesson? Stick to what  we’ve always said, keep good contemporaneous records, discuss what may not be available for a claim and which phases of a project count with your accountant. If it’s not classed as R&D, accept that. If we do agree that it’s R&D, it’s absolutely worthwhile putting a claim in.

What was announced in the budget?

The Budget itself, when mentioning R&D, mainly regurgitated announcements already made in the November Autumn statement around government spending in specific areas including public sector research, satellite communications and quantum computing.

Alongside the £20m proof of concept fund will be made available to university spin-outs to support de-risking technology.

Now onto the marmite in our R&D sandwich. Rule and calculation changes coming in from April.

Advanced Notification Form

An advanced notification form will be introduced for companies if their first accounting periods (i.e. first trading year) start on or after 1 April 2023 or if the company has not submitted an R&D claim in the previous 3 years (i.e. since 1 April 2021).

The form must also be submitted if an R&D claim is being made more than 6 months after the year end, even if you have claimed in the previous 3 years.

The lesson here? As above – be organised, document what you’re doing as you go along, help us help you complete your year-end accounts and R&D claim sooner rather than later. If you need help from us, make sure we know!

New merge scheme

Accounting periods starting on or after 1 April 2024 will also have their claim calculated under a new merged scheme – in other words the original SME and RDEC (Research & Development Expenditure Credit for larger organisations) are amalgamated. Easier for HMRC to administer, makes less cash available under the SME scheme.

Cash back rates will be at 20%, same as current RDEC rate. HMRC will also remove the restrictions for subsidised expenditure and allow large companies to claim subcontractor costs without the qualifying bodies rules complicating it.

Time for some examples.

If you’re a non-intensive loss making SME claiming £100,000 in qualifying expenses and a year end of 31 March 2024, this is how the old rules work:

Non-intensive SME 1/4/2023 – 31/3/2024
Expenses £100,000
R&D enhancement @ 86% £86,000
Total qualifying expenditure £186,000
Repayment @ 10% £18,600

Under the new ‘Merged Scheme’ rules from 1 April 2024, this will look a bit different.

Same example applies, a non-intensive loss making SME claiming £100,000 in qualifying expenses and a year end of 31 March 2025, this is how the new rules work:

Non-intensive SME 1/4/2023 – 31/3/2024
Expenses £100,000
Expenditure credit @ 20% £20,000
CT rate* 19%
Total subsidy £16,200

*The CT rate can go up to 25% depending on profit levels.

The credit will be used against any Corporation tax liability first, then used against any other outstanding tax liabilities such as VAT or PAYE. Then the rest may be surrendered and paid to your company.

Will the merge scheme make a difference?

From the 1 April 2024 the new merged scheme won’t make any difference to the amounts claimed for large companies using the same figures as the above example. However, they will no longer be able to claim for Externally Provided Workers (EPWs) but will be able to claim for contracted out R&D instead.

For R&D intensive companies (those where research expenditure is a certain proportion of expenditure) sees the calculation reduced from 40% of overall expenditure being R&D to 30%. This will need to be split for periods straddling that 1st April.

The good news about this is that the companies which qualify will be able to keep claiming the 86% enhanced expenditure along with the 14.5% repayment rate.

Stay organised, be patient and ask for help

So in summary, keep claiming when you feel there’s a genuine case, stay organised through the year to help get the claim in earlier rather than later. If you’d like to speak to our expert team, feel free to get in touch.

Be patient, and of course if you have any questions please check with a Blu Sky Client Relationship Director or Blu Sky R&D specialist.