Latest Reforms and HMRC’s Stance
The UK’s R&D tax relief framework has undergone extensive reform in recent years, with the aim of simplifying the system, reducing abuse, and encouraging genuine innovation. These changes affect companies of all sizes and come with significant compliance considerations. Professional bodies, including the Chartered Institute of Taxation (CIOT), have been actively engaging with HMRC and the government on the implementation and impact of these changes.
Key Reforms to R&D Tax Reliefs
1. Merged R&D Scheme (Effective from 1 April 2024)
From April 2024, the SME and RDEC schemes have been consolidated into a single regime offering a 20% expenditure credit. The new regime simplifies eligibility by removing the concept of subsidised expenditure and retains the more generous PAYE/NIC cap from the SME scheme.
CIOT Commentary: The CIOT expressed concern about the pace of implementation, warning that the rapid rollout may lead to confusion and inconsistent application. They have urged HMRC to ensure timely and comprehensive guidance.
2. Enhanced Support for R&D-Intensive SMEs
The threshold for R&D-intensive relief has been reduced from 40% to 30% of total expenditure, with a 14.5% payable credit available. A one-year grace period supports businesses that temporarily fall below the threshold.
3. Restrictions on Overseas Expenditure
From April 2024, subcontracted R&D and externally provided workers (EPWs) must be UK-based unless a specific exemption applies due to necessity (e.g., geographic or regulatory constraints).
4. Expanded Qualifying Expenditures
Costs for cloud computing and data licences are now included as qualifying R&D expenditure, recognising the increased reliance on digital tools in innovation.
More on qualifying expenditure
HMRC’s Enhanced Compliance Measures
- Mandatory Additional Information Form: Required for all claims, detailing project scope, uncertainties, and technological advancements.
- Advance Notification: Required for companies new to R&D claims or those that haven’t claimed in the past three years.
- Increased Scrutiny: 17% of claims reviewed in 2023–24, identifying £441m of ineligible claims.
- Expansion of Compliance Staff: Over 500 officers now working in R&D compliance.
CIOT Commentary: The CIOT has criticised HMRC’s ‘volume compliance’ approach, arguing that many legitimate claims are being unfairly challenged. They have called for better staff training and more proportionate review methods. Furthermore, the CIOT has emphasised the importance of transparent communication between HMRC and taxpayers, recommending clearer dispute resolution pathways.
Implications for Businesses
These changes present both opportunities and challenges. While the new framework seeks to simplify reliefs, the increased compliance burden, potential for disallowed claims, and short implementation window mean businesses must act with care.
High-profile disputes, such as the HMRC clawback against the men’s health app Mojo, highlight the risks of claim rejection and the need for robust documentation and professional support.
Best Practices for Claimants
- Plan Early: Don’t leave R&D reporting to year-end—build records throughout the year.
- Maintain Robust Documentation: Clearly demonstrate technological advancements and uncertainties addressed.
- Stay Informed: Monitor evolving HMRC guidance and CIOT commentary.
- Work with Specialists: Partner with qualified R&D tax advisers to maximise claims and ensure compliance.
By proactively managing R&D claims under the reformed regime, businesses can continue to benefit from valuable tax relief while mitigating the growing risk of enquiry and disallowance.