Research and Development (R&D) tax relief is a valuable incentive for businesses in the UK, providing crucial support for companies that invest in innovation. However, the landscape of R&D tax relief is continuously evolving, with recent changes that could significantly impact how businesses claim and benefit from this relief. It’s vital to stay informed about these changes to ensure your business maximises its opportunities.

Understanding the latest changes

Recent updates to R&D tax relief have introduced several adjustments that businesses need to be aware of. One of the most notable changes is the reform of the R&D tax credit scheme for SMEs (Small and Medium Enterprises). Historically, the SME scheme has been more generous than the R&D Expenditure Credit (RDEC) scheme, which applies to larger companies. However, the latest amendments are beginning to narrow this gap.

The SME scheme’s additional tax relief rate has been reduced from 130% to 86%, while the loss-making companies’ tax credit has decreased from 14.5% to 10%. These changes aim to align the SME scheme more closely with the RDEC scheme, which currently offers a tax credit of 20% on qualifying R&D expenditure. For many businesses, this reduction in relief could mean a significant decrease in the cash benefits they receive.

The impact on businesses

These adjustments are likely to affect a wide range of businesses, particularly those traditionally relying on the SME scheme for substantial tax relief. The reduction in the relief rate means that companies will now receive less from their R&D expenditure, which could impact cashflow and the ability to reinvest in further innovation.

For some businesses, this could mean re-evaluating R&D projects or seeking alternative funding sources. However, it’s not all negative. While the reduction in relief might seem like a drawback, it’s important to remember that the RDEC scheme has been made more accessible to a broader range of companies, including those that may not have previously qualified. This change opens up new possibilities for businesses to claim R&D relief under a different framework, potentially offsetting some of the impacts of the reduced SME relief.

New qualifying expenditure categories

Another key change is the expansion of qualifying expenditure categories. The government has recognised the growing importance of data and cloud computing in R&D activities and has extended the definition of qualifying costs to include expenditure on these areas. This change is particularly relevant in today’s digital age, where data-driven innovation is at the forefront of many R&D projects.

Businesses investing in cloud computing, big data analytics, and other digital technologies can now include these costs in their R&D tax relief claims. This expansion could help offset some of the reductions in relief rates, particularly for tech-driven companies increasingly reliant on these technologies for their R&D activities.

Increased focus on compliance

With the changes in R&D tax relief, there is also an increased focus on compliance. The government has signalled its intent to clamp down on erroneous claims and ensure that only genuine R&D activities receive tax relief. As part of this, businesses are now required to provide more detailed information with their claims, including a description of the R&D activities and how they meet the criteria for relief.

This change means that businesses will need to be more diligent in documenting their R&D activities and ensuring they can substantiate their claims. Failure to do so could result in claims being rejected or even penalties. Therefore, it’s essential to keep thorough records of all R&D projects and to work closely with your accountant or tax adviser to ensure compliance with the new requirements.

How to stay ahead

Given these changes, businesses must proactively manage their R&D tax relief claims. Here are some steps to help ensure you stay ahead:

• Review your current R&D projects. Assess whether your projects still qualify under the new rules and determine the potential impact of the reduced relief rates. If necessary, consider re-evaluating your R&D strategy to align with the new criteria.
• Explore the RDEC scheme: If your business has traditionally relied on the SME scheme, now might be the time to explore whether the RDEC scheme could offer better benefits. This is particularly relevant if your company’s R&D expenditure is high, as the RDEC scheme may provide a more stable form of relief.
• Keep detailed records: With the increased focus on compliance, maintaining accurate records of your R&D activities is more important than ever. This includes documentation of the scientific or technological advancements your projects aim to achieve and detailed financial records of your expenditures.
• Seek professional advice: The changes to R&D tax relief can be complex, and it’s easy to miss out on potential benefits if you’re not fully informed. Working with an experienced accountant can help ensure you’re making the most of the available relief and staying compliant with the new rules.

Seek help

The recent changes to R&D tax relief present both challenges and opportunities for UK businesses. While reducing relief rates for SMEs may impact some companies, the expansion of qualifying expenditure categories and the accessibility of the RDEC scheme offer new avenues to explore.

At EV Accountants, we are committed to helping our clients navigate these changes and maximise their R&D tax relief opportunities.

Contact us to ensure your business stays ahead in the ever-changing tax landscape.