Out with the old, in with the new

Following two or more years of turbulence while HMRC has tried to close down perceived abuse of the R&D tax regime, we are now into the brave new world of the integrated R&D Expenditure Credit (‘New RDEC’). This applies to accounting periods beginning on or after 1 April 2024 and replaces the previous R&D Tax Relief for SMEs and the old R&D Expenditure Credit that was available to large companies and certain SMES.

New RDEC is available to SMEs and large companies alike and is very different from the old SME Enhanced Relief. It replaces the additional tax deduction, (the ‘enhancement’), with a 20% tax credit based on qualifying R&D spend. As this credit is taxable, the value of claims under New RDEC is 15% of qualifying expenditure. For non-taxpayers, this can take the form of a cash credit equal to 16.2% of the qualifying costs, provided the company would have been loss-making prior to its New RDEC claim. Otherwise, the cash credit is equal to 15% of the qualifying costs.

There is also a change regarding R&D performed under contract that could have a widespread impact on the manufacturing sector. Before New RDEC, if the claimant was an SME it could only claim the old Enhanced Relief for its in-house R&D. If it was carrying out R&D under contract, it could claim the old RDEC as long as its customer was a large company and/or not a UK tax resident. Otherwise, no claim could be made. Likewise, for large companies, only in-house or R&D performed for large/non-UK tax resident customers could be claimed. However, the lack of a clear definition of when R&D was performed under contract has made this a hot topic, with HMRC taking several cases to the Tribunal on this point, which have been largely unsuccessful.

 In contrast, under the new RDEC, the party that initiates the R&D makes the claim (although the exception for non-UK-resident customers or certain tax-exempt bodies still exists). The claim is made by the customer when it is reasonable to expect that they intended or contemplated the contractor having to perform R&D to deliver on the contract. Otherwise, the contractor is entitled to claim, regardless of whether they are an SME or a large company. As a result, some companies that have been used to claiming R&D relief will find they no longer qualify, but others may find the new rules working in their favour.

Putting this into a manufacturing context, if a customer provides a very detailed technical specification that indicates an understanding of the technology involved, this is a good indication that they anticipate the contractor will have to perform R&D. In that case, it is the customer who can make the claim.

In contrast, if the spec is light on technical detail and the product is not one where the customer would be expected to be familiar with the technology, there is a possibility the contractor could claim, although this will hinge on the underlying details. HMRC has said that it means not only reviewing the contract, but also scoping and tendering correspondence, so that all evidence is taken into account. Incidentally, it is not enough to agree with your customer which of you will claim if the facts do not support the position taken, but it could be helpful to include an R&D claim clause in the contract.

As always with tax matters, it is better to be proactive rather than reactive. Taking advice on whether (or when) your contractual arrangements might allow a claim, is much better than ’taking a punt’ on a claim that would be vulnerable to an HMRC challenge. Of course, there have been some horror stories recently about inept or even fraudulent R&D advisors, so always make sure you are taking your advice from a trusted source.

The information contained within this publication is given by way of general guidance. Specialist advice should always be sought in relation to your particular circumstances. No liability is accepted by Ensors for any actions taken without seeking appropriate professional advice.