Research and Development (R&D) tax credits are a great opportunity for companies looking for an affordable way to find innovative solutions to problems.

However, R&D rules are stricter than they used to be, with HMRC becoming more rigorous in its checks. As such, here’s what you need to consider when making a claim.

Additional information now required on R&D claims

In the recent Finance Bill, the Government brought forward a new measure that R&D applicants must provide additional detail alongside their claims from 1 August 2023.

The extra information now required includes breakdowns of qualifying expenditure and descriptions of the exact R&D information your business takes. If you don’t send the online ‘additional information’ form to HMRC by the time you file your corporation tax return, your R&D claims will be invalid.

The requirement for additional information is part of the Government’s plan to improve compliance and reduce abuse of the SME R&D scheme, and we would strongly suggest you do not underestimate the amount of extra work this change might put on your business.

New and former claimants

Those claiming R&D tax credits for the first time from 1 April 2023 onwards, or those who have not made a claim in the last three accounting periods, now have to notify HMRC that they intend on making a claim ahead of time. This is necessary for both the SME scheme and the Research and Development Expenditure Credit (RDEC).

To notify HMRC, you need to submit an online form within six months of the end of the accounting period in which you intend on making the claim. You’ll receive email confirmation of your submission, which will contain a reference number.

You do not need to include your reference number when you want to make your claim; however, you should keep hold of it in case you need to discuss it with HMRC.

UK-based research only delayed until 2024

To discourage companies from offshoring innovation, the Government plans to require all qualifying activities to take place in the UK. However, this proposal has been delayed and will come into effect from 1 April 2024.

This geographic restriction will also apply to work completed by externally provided workers, which will have to be done in the UK to qualify.

There will be some specific exemptions offered for projects that can only take place in certain regions due to geographical, environmental, social, regulatory or other needs.

One to watch out for: merging of schemes

The SME scheme and the RDEC are two separate schemes and will be for the foreseeable future. However, the Government opened a consultation in July to explore the possibility of merging them into one scheme.

On why this policy is on the table, the Government said:

“This would present significant opportunities for tax simplification, including having a single set of qualifying rules, [and] being able to remove the exceptions for subcontracting to certain types of entity, known as ‘qualifying bodies’.”

While this is only in the consultation phase, the Institute of Chartered Accountants in England and Wales said we could see the change as early as April 2024. We’ll know more when Jeremy Hunt delivers his Fiscal Statement on 22 November, so keep on the lookout for that.

We understand that R&D claims are often difficult to navigate, so don’t hesitate to get in touch with us for assistance.