R&D Tax Credit Changes 2024: What UK Businesses Need to Know

Research and Development (R&D) tax credits offer financial relief to businesses investing in innovative activities. However, many UK businesses, particularly startups and smaller companies, miss out on these opportunities due to a lack of awareness about their eligibility.

With major R&D tax credit changes in 2024, UK businesses must navigate the updated schemes, including ERIS (Enhanced R&D Intensive Support) and the merged credit system.

This blog will help you navigate the updated schemes, highlight the key changes, and guide you through the claims process—particularly if your business qualifies for ERIS.

Key Points at a Glance

• Merged R&D Tax Credit Scheme: Aimed at larger businesses and certain SMEs, offering a 20% tax credit for qualifying R&D expenditure (RDEC).
• ERIS: An enhanced scheme for loss-making SMEs with significant R&D expenditure, offering an extra 86% deduction (186% in total) and up to 14.5% payable tax credit.
• Eligibility: Businesses must meet criteria such as being subject to Corporation Tax in the UK, incurring qualifying R&D costs, and meeting the intensity condition (30% of total costs spent on R&D for ERIS).
• Claim Process: Businesses must identify qualifying R&D activities, track qualifying costs, and complete the Additional Information Form, including technical details of the projects as part of the Corporation Tax return.
• Common Mistakes: Including non-qualifying activities, misclassifying costs, and failing to meet the intensity condition for ERIS.

What Are R&D Tax Credits?

R&D tax credits are a government initiative designed to reward businesses that innovate and develop new products, services, or processes. As of April 2024, the system includes two schemes:

• The merged R&D tax credit scheme, which incorporates the RDEC (Research and Development Expenditure Credit) for larger businesses and certain SMEs.
• ERIS (Enhanced R&D Intensive Support), specifically for loss-making SMEs that are heavily invested in R&D activities.

Each scheme offers different types of support, eligibility criteria, and benefits, allowing businesses to claim tax relief for their qualifying R&D expenditure. At ASWATAX, we ensure our clients understand these nuances and maximise their claims effectively.

R&D tax credits are a government initiative designed to reward businesses that innovate and develop new products, services, or processes.

The Merged R&D Tax Credit Scheme

The merged R&D tax credit scheme is designed for businesses that do not qualify for ERIS, including larger businesses and some SMEs. This scheme allows businesses to claim a Research and Development Expenditure Credit (RDEC) for their qualifying R&D activities.

RDEC (Research and Development Expenditure Credit)

• Who is it for? Larger businesses and SMEs that do not meet the criteria for ERIS.
• Benefits: Provides a 20% tax credit based on qualifying R&D expenditure, which can offset Corporation Tax or be refunded as cash for loss-making businesses.
• Eligibility: Businesses must be subject to UK Corporation Tax and have incurred qualifying R&D costs within the UK.

ERIS (Enhanced R&D Intensive Support)

ERIS provides additional support for loss-making SMEs engaged in intensive R&D activities. To qualify for ERIS, your business must meet the following criteria:

• Meet the Intensity Condition: At least 30% of your total costs (including those of connected companies) must be spent on R&D activities.
• Enhanced Deductions: Loss-making SMEs can claim an extra 86% deduction on qualifying R&D costs, on top of the standard 100% deduction already accounted for in their accounts. This gives a total deduction of 186% of qualifying R&D expenditure.
• Payable Tax Credit: ERIS offers a payable tax credit worth up to 14.5% of the surrenderable loss, providing vital cash flow support for businesses.

For businesses in Northern Ireland, additional guidance may apply. ASWATAX provides tailored advice to ensure all regional nuances are accounted for.

Eligibility Criteria for the Merged R&D Tax Credit Scheme

To qualify for the merged R&D tax credit scheme, your business must:

• Be subject to UK Corporation Tax.
• Have incurred qualifying R&D costs within the UK.
• For RDEC claims, meet the criteria relevant to larger companies or SMEs outside ERIS.
• For ERIS, meet the Intensity Condition, ensuring R&D expenditure accounts for at least 30% of total costs.

How to Claim R&D Tax Credits

Here’s how to claim your R&D tax credits under either scheme:

1. Check Whether Claim Notification Is Required: Where required, you must notify HMRC of your intention to claim within 6 months of the end of the accounting period.
2. Identify Your R&D Activities: Ensure your project involves overcoming scientific or technological uncertainties.
3. Track Your Qualifying Costs: These include staff costs, consumables, software, and subcontractor expenses (limited to 65% for unconnected subcontractors).
4. Prepare a Detailed Technical Report: Highlight the scientific or technological challenges tackled in your project. Use this to inform the Additional Information Form (AIF).
5. Submit Your Additional Information Form and Corporation Tax Return: Include detailed calculations and evidence.
6. Receive Your Tax Credit: HMRC will reduce your tax liability or issue a cash refund.

For further details, refer to the Additional Information Form Guidance.

Common Mistakes to Avoid When Claiming R&D Tax Credits

Here are some common mistakes businesses often make when claiming R&D tax credits:

1. Including Non-Qualifying Activities:
2. Ensure your activities meet the scientific or technological criteria for R&D. Routine business improvements or standard operations do not qualify.
3. Incorrectly Categorising Costs:
4. Only certain costs are eligible for the tax credit. For example, subcontractor costs are limited to 65% for unconnected subcontractors, so ensure you apply this correctly.
5. Missing the Intensity Condition for ERIS:
6. If claiming under ERIS, your R&D expenditure must be at least 30% of your total expenditure. Failing to meet this condition can disqualify your claim.
7. Lack of Detailed Documentation:
8. Ensure that you create a thorough technical report that explains your project and how it addresses scientific or technological challenges. The technical report should be used to inform and structure the responses on the Additional Information Form (AIF), ensuring HMRC can assess the nature of the work and the technological advancements involved.

Maximising Your R&D Tax Credit Claim

• Keep meticulous records of R&D-related costs.
• Engage a professional to ensure all qualifying activities are identified.
• Prepare a detailed technical report and ensure the AIF aligns with your project details.

At ASWATAX, we specialise in optimising R&D tax credit claims for diverse sectors, including software, artificial intelligence, engineering, and seaweed farming.

Final Thoughts

The introduction of the merged R&D tax credit scheme and ERIS provides UK businesses with enhanced opportunities to recover costs and fund further innovation. Whether you’re a large corporation or a loss-making SME, these schemes can offer significant financial benefits.

Ready to claim your R&D tax credits? ASWATAX is here to guide you through every step of the process. Contact us today to maximise your claim and unlock valuable funding for your business.

Learn more about R&D tax credits on our ASWATAX resources page.

For further guidance, refer to the official HMRC R&D Tax Reliefs Guidance or contact us for expert support.