Change Of R & D Tax Regime From 1 April 2024
For many manufacturing businesses, development and innovation is at the very heart of what they do. From coming up with unique products to integrating new technology into the manufacturing process, companies who manufacture are at the forefront of research and development. M any businesses in the sector make use of Research and Development (R&D) Tax Relief to help recoup some of the significant outlay involved in this innovation. The R&D tax regime has been under HMRC’s microscope in recent years and from 1 April 2024, there are further significant changes. Following on shortly from the changes announced in the last two years, these changes dramatically reduce the amount of R&D tax relief available to many owner managed businesses. Chris George, Tax Partner, explains what the key changes are: qualifying expenses. If, for example, a company spent £100,000 on R&D qualifying costs, they received an additional deduction of £86,000, reducing their Corporation Tax liability. The Corporation Tax saving equates to £86,000 at the Corporation Tax rate of 25%, meaning an effective tax saving of 21.5% on the £100,000 of qualifying expenditure. And as well as this one simple set of rules, there will be another set of rules for companies which meet the definition of R&D intensive. The SME scheme previously available to the vast majority of claimants was relatively simple. It worked by providing an uplift on R&D
If the R&D claim created or enhanced a loss, this could be surrendered for a repayable tax credit. The RDEC scheme however takes a little bit more effort to get your head around. Instead of an enhanced expense, companies have an ‘above the line’ taxable credit. This amounts to 20% of the qualifying expenditure. So, taking forward the example above, this is the £20,000 income amount shown in the table. The Corporation Tax liability is then calculated on this profit before the RDEC credit is then deducted. For a company paying at the full 25% rate, the effective tax saving is 15%. This is a significant reduction from the 21.5% that the company could claim in the previous year.
Key Changes For accounting periods starting on or after 1 April 2024, the two current R&D schemes are being merged into one scheme, based on the previous large company Research and Development Expenditure Credit (RDEC) scheme. The aim of this merger is to make claiming R&D tax relief simple, easy for businesses to understand with one set of rules. However, the main problem with this, is that one set of rules is based on the large company RDEC scheme, which 87% of companies have never used before!
Year Ended 31 March 2023
£
Year Ended 31 March 2024
£
Profit
500,000
Profit
500,000
R&D expenditure
(100,000)
R&D expenditure
(100,000)
R&D uplift
(86,000)
RDEC credit
20,000
Taxable profit
314,000
Taxable profit
420,000
Corporation Tax
78,500
Corporation Tax
105,000
R&D Extra Tax Saving
21,500
Deduct RDEC
(20,000)
Net Corporation Tax payable
85,000
R&D Extra Tax Saving
15,000
6 | SCRUTTON BLAND | MANUFACTURING A N D ENGINEERING
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