The UK Government recognises that encouraging innovation is a vital component in a strategy for improving the UK’s productivity, performance and competitiveness. As a result, there has been significant change to the research and development (R&D) regimes to encourage and reward greater innovation in the UK.
Given the significant amount of change to the R&D regimes over recent years, it is important that claimants are assessing the impact of these changes and are adapting their existing R&D claims process to ensure that they are claiming their full entitlement to these valuable incentives.
Our experienced team works with claimants to:
- develop methodologies which allows for the full spectrum of R&D activities to be considered in real-time;
- deploy technology tools to allow for a streamlined process to capture the required information to evidence the eligible R&D activities;
- consider a range of incentives, including patent box, capital allowance and overseas R&D claims, to make sure a consistent and efficient approach is taken to a range of incentive claims.
More information on how each R&D credit regime operates, and the recent changes to the regimes, is detailed below.
Recent changes to UK R&D regimes
- The merged R&D Expenditure Credit regime
- Mandatory documentation requirements
- Expansion of qualifying costs and activities
- SME Enhanced R&D intensive regime
The merged R&D Expenditure Credit regime
The merger of the SME and large company RDEC schemes applies for accounting periods commencing on or after 1 April 2024.
The new R&D regime is broadly aligned with the existing RDEC regime and is designed as an ‘above the line’ credit offering similar cash credit rates as the existing RDEC regime. The key differences to the existing RDEC regime are:
- Eligibility of Subcontract costs: subcontracted R&D costs can be included in claims (with the aim that the decision maker should have the right to claim for the R&D activity even where subcontracted out), however the rules are complex and careful assessment will be needed to determine who is eligible to claims
- A more generous amended PAYE cap: this is similar to the existing SME PAYE cap. The amount of the PAYE cap for claims under both the merged scheme and the SME enhanced R&D Intensive Scheme (ERIS) (see below) is £20,000 plus 300% of the company's relevant PAYE and National Insurance contributions liabilities.
- Restrictions on the inclusion of overseas costs: there will be restrictions for expenditure incurred outside the UK unless exceptions apply. The exceptions are narrowly defined and businesses need to consider the impact of these changes on their claims and potentially consider a global approach to R&D claims.
The changes incorporated as part of the merged R&D regime are some of the most significant changes to the R&D regime in recent years so businesses should be considering the impact on their claims as soon as possible.
Mandatory documentation requirements
The Additional Information Form (AIF) is mandatory for claims submitted on or after 8 August 2023. The AIF requires descriptions of the R&D undertaken, a breakdown of the qualifying costs, details of the company’s R&D advisor and CT agent. It also requires sign off from a senior officer of the company. This requirement adds to the administrative burden of companies and may significantly impact companies who have typically not submitted detailed documentation with claims.
To minimise HMRC queries and delays with the claim processing, businesses should carefully consider the timeliness and level of detail provided in support of their R&D claims (even those who already submit supporting documentation), factoring in sufficient time to prepare and submit the AIF alongside the tax return that includes the R&D claim.
Expansion of qualifying costs and activities
For accounting periods commencing on or after 1 April 2023, qualifying R&D costs were expanded to include data acquisition and cloud computing costs. This is likely to be particularly relevant to companies analysing large volumes of data and/or requiring cloud computing resources for the purposes of R&D activities.
With the ever increasing convergence of technology in various industries, businesses should explore to what extent data acquisition and cloud computing are involved in the performance of their R&D. This could add significant qualifying costs to some companies’ claims.
In addition, from the same date as above, advances in pure mathematics were added as an eligible R&D activity in the DSIT guidelines.
SME Enhanced R&D intensive regime
There is a new R&D intensive regime offering a 27% cash benefit for loss making SMEs whose R&D expenditure constitutes at least 40% (for expenditure incurred on or after 1 April 2023) or 30% (for accounting periods commencing on or after 1 April 2024) of total expenditure.
The rules apply for expenditure incurred on or after 1 April 2023 to allow a higher credit rate of 14.5% for loss-making R&D intensive SMEs equivalent to a cash benefit of £27 for every £100 (186% x 14.5%).
Whilst many R&D focussed businesses may assume they are eligible for the the R&D intensive regime, care is needed to ensure that the ratio of R&D spend to total expenditure is considered - this is particularly relevant for global businesses with connected companies expenditure (including overseas expenditure) needing to be considered.
How we can we help
It is important that companies understand how these changes will impact their R&D claims and wider capital investment decisions going forward. In practice, the changes are likely to have a significant impact on claims and at the same time increase the compliance burden. We can help you consider how the changes may impact the value from your claims and at the same time, how to utilise your wider processes and available data to reduce the time demands of preparing claims.
Working across PwC’s broad range of specialist services we can help you explore all incentives available to you and its impact on your wider tax, financial and commercial activities so you can further enhance and accelerate your business opportunities. We have highly qualified industry professionals with significant experience of R&D and capital incentives in their relevant industries who would be happy to discuss how we can help make sure your incentive processes are optimised.
SME R&D Tax Relief
The R&D tax credit available to small and medium enterprises (SMEs) is a 186% super-deduction with a 10% credit for loss making SMEs, resulting in a cash benefit of c18.6% (reduced from 33% from 1 April 2023) of the qualifying expenditure. This regime only applies to accounting periods ending before 1 April 2024. For accounting periods commencing on or after 1 April 2024, SMEs may be able to claim under Merged R&D Expenditure Credit scheme. Additionally, the SME Enhanced R&D Intensive Support (see below for further information) is available for certain loss making SMEs.
SME Enhanced R&D Intensive Support (ERIS)
ERIS allows loss-making R&D intensive SMEs to claim 186% super-deduction with a 14.5% payable credit rate (resulting in a c27% cash benefit). The ability to claim under this regime is subject to meeting an R&D intensity condition and having made a trading loss in the period (before ERIS). The R&D intensity condition requires that at least 40% of total expenditure of the company (plus its connected companies) is on R&D expenditure for expenditure incurred on or after 1 April 2023) or 30% (for accounting periods beginning on or after 1 April 2024).
The calculation of the R&D intensity percentage is highly complex and care needs to be taken in making sure the total relevant expenditure (TRE) is calculated accurately (to include all global connected companies TRE) and R&D costs are calculated and allocated appropriately.
For accounting periods starting on or after April 2024 there is no restriction on claiming for subsidised expenditure under ERIS. However, as per above the new complex rules regarding overseas costs and subcontracted R&D costs will apply.
R&D Expenditure Credit (for accounting periods starting before 1 April 2024)
What is it?
The Research and Development Expenditure Credit (RDEC) is available for large companies and certain SMEs unable to claim under the SME R&D regime.
RDEC allows companies to recognise the benefit of their R&D claim ‘above the line’, effectively as a grant against cost, which helps add visibility. Loss makers can also claim cash back from HMRC.
What is the benefit?
From April 2023, the credit rate increased to 20% (from 13%), providing a net cash benefit of 15% at a 25% tax rate for taxpayers. Additionally, RDEC is payable regardless of the tax position of the company, offering an in year cash benefit repayment of 16.2% (after tax), subject to some restrictions including a cap based on PAYE and NI.
Merged R&D Expenditure Credit (for accounting periods starting from 1 April 2024)
What is it?
For accounting periods starting on or after 1 April 2024 the merged Research and Development expenditure credit is available for all companies, regardless of size1. The regimes offers a taxable ‘above the line’ expenditure credit.
What is the benefit?
As with the RDEC regime, the merged regime provides a credit rate of 20% on eligible R&D expenditure. For companies with taxable profits greater than £50,000, the credit is taxable, therefore at the 25% corporation tax rate, the net cash benefit is 15%.
For loss-makers2, the credit is repayable following the deduction of a 19% notional tax, providing a cash benefit of 16.2%. There are also a number of other ‘payment steps’ which must be followed to calculate the amount repayable, including consideration of a PAYE cap, which is £20,000 plus 300% of the company's relevant PAYE and National Insurance contributions liabilities.
[1] Companies eligible under the SME Enhanced R&D Intensive Scheme (ERIS), can opt to claim under the new merged scheme instead of ERIS, if they wish.
[2] And companies with total profits chargeable to Corporation Tax of less than £50,000
Any other considerations?
Whilst the definition of eligible R&D activities remains the same as the previous RDEC and SME R&D regime, there are some additional complexities in relation to contracted costs and overseas costs. It is therefore really important that companies consider these complexities early to understand the impact on claims.
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