R&D tax relief framework: unlocking maximum benefits in 2025

30 January 2025 / Insight posted in Articles

2024 was a tumultuous year for the UK’s research and development (R&D) regime. As evidence of fraud and compliance errors increased, HMRC took a more assertive approach to reviewing R&D tax relief claims, triggering penalties and discovery assessments and re-opening claims agreed over six years ago.

Further, HMRC has recently launched a new disclosure facility to help businesses voluntarily correct inaccuracies in their R&D claims, increased the mandatory information that must be provided, and now requires new claimants to pre-notify HMRC of the intention to make claims within six months of the end of the accounting period – catching many new companies out.

Responding to compliance checks is increasingly a significant burden for companies. However, while HMRC has been more assertive in combating error and fraud, they haven’t always got it right, with high-profile First-tier Tribunal decisions finding for the taxpayer.

HMRC’s scrutiny was against the backdrop of the new government’s mission to accelerate growth.  R&D tax credits remain the most significant incentive available to companies. Other government encouragement for business investment and innovation include broadening the scope of enhanced support for small and medium-sized enterprises (SMEs), more direct grants, a relatively more attractive Patent Box regime and revamped capital allowances. For companies facing economic headwinds on entering 2025, ensuring they consider all these incentives and how they can fund innovation and growth is vital.

The R&D tax relief framework underwent significant changes in 2024, culminating in the introduction of the ‘merged’ scheme designed to streamline support for innovation across businesses of all sizes. With 2025 already under way, it is essential to understand these key themes and prepare accordingly to secure the available benefits.

Key themes of the 2024 R&D tax relief changes

  1. Merged R&D scheme: Effective from accounting periods beginning on or after 1 April 2024, the UK government merged the previous SME and RDEC schemes into a single R&D tax relief framework. This unified scheme offers an above-the-line credit of 20% on qualifying R&D expenditures, which translates into an effective relief rate of 16.2% for companies subject to the standard corporation tax rate.
  2. Enhanced relief for R&D-intensive SMEs (ERIS): The scheme recognises the critical role of SMEs in driving innovation by providing alternative relief for loss-making, R&D-intensive SMEs. These companies can claim a payable tax credit of nearly 27% on qualifying R&D expenditure. To qualify, an SME must allocate at least 30% of its total expenditure to R&D activities, reducing the previous threshold from 40% to 30% as of 1 April 2024, thereby broadening eligibility.
  3. Territorial restrictions on R&D activities: The scheme has significantly shifted to emphasise domestic R&D. Tax relief is now generally restricted to R&D activities conducted within the UK. Exceptions apply where specific conditions necessary for the R&D cannot be met domestically and replicating them in the UK would be unreasonable. For companies using overseas resources in their R&D projects, understanding these exemptions is key to maintaining their benefits.
  4. Revised treatment of contracted-out R&D: The new scheme updates the approach to R&D activities contracted out to third parties. Businesses can claim tax relief for the costs associated with contracted-out R&D, provided certain conditions are met. This adjustment acknowledges the collaborative nature of modern R&D, where outsourcing specialised tasks is common but which company benefits from these collaborative projects relies on careful analysis. For companies engaging with customers or third-party suppliers on their R&D projects, grasping these new rules is critical to understanding their benefits, which may be increasing or decreasing as a result of the change.

Preparation strategies for companies in 2025:

  1. Review eligibility: Companies should conduct a thorough review of their R&D activities to determine eligibility under the merged scheme. Understanding the specific criteria and relief rates applicable to their operations is crucial for effective planning and compliance.
  2. Evaluate R&D expenditure: With the introduction of territorial restrictions, companies must assess the location of their R&D activities and whether exemptions apply. If not, re-shoring R&D within the UK may be necessary to fully benefit from the available tax reliefs.
  3. Review contractual arrangements: The changes in how contracted-out R&D is treated are nuanced and must reflect the particular circumstances. There will be both winners (companies claiming for more R&D activities and expenditures) and losers (companies no longer be able to claim). Companies should scrutinise existing and future contracts and relationships related to R&D activities. Structuring contracts may help meet the new criteria and facilitate the claiming of eligible tax reliefs.
  4. Maintain comprehensive documentation: Companies have always been encouraged to maintain accurate and detailed record-keeping of R&D activities and expenditures. This supports claims and ensures compliance with HMRC requirements, especially considering increased scrutiny to combat fraud and errors in R&D tax relief claims. However, more than ever, these changes place more emphasis on this and documenting the rationale for contracting out and territorial decisions will be vital.
  5. Consult tax professionals: Due to the complexity of the new scheme, seeking advice from tax professionals with expertise in R&D tax relief provides valuable insight. Moore Kingston Smith’s specialist R&D team can assist you in navigating the changes, preparing robust, optimised claims and ensuring you secure your available benefits.

In summary, the 2024 reforms to the UK’s R&D tax relief scheme, coupled with HMRC’s increased scrutiny, require companies to proactively change their approach if they wish to efficiently optimise the benefits available in 2025 and beyond. Contact your Moore Kingston Smith service team for more details on how we can help you navigate the changed landscape.

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