Possible changes to Research and Development (R&D) tax credits in the upcoming Autumn Budget?

The UK's R&D tax credit scheme has undergone significant changes, with the introduction of the Merged R&D Scheme taking effect from April 2024. This new scheme aims to streamline the process and target genuine innovation, particularly among small companies.

Eligibility and Key Details

To qualify for R&D tax credits, companies must be subject to UK Corporation Tax, which includes UK limited companies, SMEs with fewer than 500 employees, turnover under €100m, or balance sheet under €86m. Only companies paying UK Corporation Tax can claim, with partnerships, sole traders, charities, or most overseas entities generally ineligible.

The qualifying R&D projects must seek to advance science or technology overall, addressing scientific or technological uncertainties that are not readily solved by professionals in the field. Eligible costs include staff salaries, employers' NIC, pension contributions, consumables, software, cloud computing, subcontractor costs, and some intangible assets.

Under the Merged Scheme, a taxable credit of 20% applies to most companies, equivalent to a net benefit of about 15–16% after tax. Loss-making, R&D-intensive SMEs (those with qualifying R&D spend ≥30% of total expenditure) qualify for the Enhanced R&D Intensive Support (ERIS) regime, offering up to a 186% super-deduction for qualifying costs plus a 14.5% payable cash credit on surrendered losses, subject to PAYE/NIC caps.

Compliance and Evidence

Claimants must maintain detailed records including project plans, uncertainties, test results, and expert evaluations. HMRC introduced an additional information form in August 2023 that all claims must include, aiding compliance checks.

Potential Changes and Anti-Fraud Measures

The merged scheme itself is a simplification, aiming to reduce complexity and potentially lessen fraudulent claims by consolidating SME and RDEC into one framework. HMRC requires comprehensive documented evidence and now demands submission of a detailed supplementary form with claims to increase transparency and detect fraudulent or inaccurate claims.

The introduction of the ERIS regime includes caps on payable credits (linked to PAYE/NIC) to limit abuse by loss-making companies claiming excessive relief. Planned updates to the Corporation Tax online service aim to improve claim processing and clarify exemptions (such as those for intellectual property creators) by April 2026, indicating ongoing efforts to tackle errors or fraud.

Summary

Eligibility: UK Corporation Tax–liable companies only; SMEs and large firms qualify under the merged scheme.
R&D definition: Must advance science/technology beyond routine improvements.
Scheme: Single 20% taxable credit generally; enhanced super-deductions + cash credits for highly R&D-intensive SMEs.
Anti-fraud: Documentation requirements, new forms, capped credits, and digital service upgrades to reduce fraudulent claims and improve compliance.

These changes reflect the current rules and reforms designed to ensure R&D tax credits are targeted at genuine innovation, especially by small companies, while safeguarding public funds through improved compliance measures.

Under the new merged R&D tax credit scheme, businesses can claim back up to 27% of their innovation costs. The reforms aim to simplify the R&D tax credit system and crack down on ineligible claims. Businesses investing in innovation can offset some of the cost against their corporation tax.

However, it is important to tread carefully with claims to avoid a difficult inquiry from HMRC. It may be a good idea to seek professional advice from an accountant or a tax credits specialist before proceeding with a claim.

As the annual cost of R&D tax credits has reached around £7.5 billion, the government has become increasingly concerned about the quality of claims and fraud. HMRC has been scrutinizing filings more closely, and has the power to claw back credits it decides should not have been paid, with a growing number of small businesses receiving bills for thousands of pounds.

Despite these concerns, more than 55,000 small businesses received R&D tax credits last year. A small cottage industry has grown up around the tax-credits sector, with firms making bold claims about the support they can secure for businesses. They typically take a sizeable chunk of this cash.

Rachel Reeves is considering targeting R&D tax credits in her first Budget. The new arrangements have merged the two separate schemes that discriminated between small and larger businesses. Claims can be made in relation to innovation costs incurred in the past two accounting years.

In the context of R&D tax credits, businesses investing in innovation can claim back up to 27% of their costs, as per the new merged R&D tax credit scheme.
To ensure genuine innovation and safeguard public funds, businesses claiming R&D tax credits should be aware of the detailed records, potential changes, and anti-fraud measures required by HMRC.

Possible changes to Research and Development (R&D) tax credits in the upcoming Autumn Budget?