Changes to the scheme
Recent Budgets have seen significant changes to the way R&D credits are claimed and scrutinised, with a focus on compliance and the enquiry process, which have caused a lot of strife to advisors and claimants. The increased disclosure requirements and the inconsistent and aggressive enquiry approaches by HMRC have been particularly challenging, especially given the Government’s suggestion that it is seeking to boost innovation, leaving many genuine claimants disenfranchised and unsure as to whether to pursue a claim. Some of the changes mentioned appear to aim to reassure both advisors and claimants and ensure compliance with more certainty.
Impact of the merged scheme
The largest change is the confirmation of the merged scheme, which will take the format of an ‘Above the Line’ credit, which already exists within the Research and Development Expenditure Credit (RDEC) scheme (which currently operates in parallel with the small and medium-sized enterprises (SME) scheme). This 20% credit aims to reduce the complexities associated with the various rates calculated, based on both company size and the relationship between stakeholders. These rules will be in place for accounting periods starting on or after 1 April 2024.
As part of this, we are hoping to receive clear guidance on previously ambiguous areas, such as the role of subcontractors in the R&D process and determining who is entitled to the credits. The main issue with the new scheme is the lack of guidance on who is entitled to make a claim in a subcontracting scenario- a consultation on this was had, which closed at the start of March 2024. Therefore, we are currently waiting for updated guidance to be released, to enable us to advise clients to what extend they are still eligible to claim and if any changes to their existing or future contractual agreements would help, if they are not.
The SME intensive scheme
Further to the merged scheme, HMRC has announced confirmation of the R&D intensive SME scheme, available only to loss making companies, whilst lowering the qualifying expenditure requirement from 40% of total, tax-adjusted spend to 30%, making it more accessible. This will apply to accounting periods starting on or after 1 April 2024, with the provision of a ‘grace year’ which will safeguard entities against momentary fluctuations in percentage spend.
Improving sector specific knowledge
An important point which can only be discovered through the supporting documentation for the Budget, is the creation of a specialised advisory council by HMRC. This aims to address criticism of HMRC’s handling of claims, where a lack of industry knowledge has caused confusion as to the validity of claims, especially in fast-evolving fields such as software and life sciences. This seeks to provide up-to-date sectoral insights from industry experts, which will allow for a more accurate assessment of technical advancements and uncertainties.
Reflections and insights
Although most of the announcements were to be expected, it has been good to have some assurances of what we expected would happen. A move towards more stability and clarity is a welcome one, should things pan out in a positive way. After a period of confusion that has left many advisors and claimants unsure of the future, we hope the merged scheme will be the beginning of a better process. Additionally, the hope is that the advisory council will provide much needed expertise to HMRC when assessing claims and will reduce the number of genuine claimants who are being scrutinised unnecessarily, as a result of poor industry knowledge.
For support with your R&D claims or further guidance based on any of the above, please get in touch with the Business Tax team.
