Scaling a tech business? Key changes to R&D tax reliefs you should know

Introduced in 2000, these incentives were seen as low-risk funding for early stage and scaling tech businesses, offering tax savings and cash payments for R&D spend.

However, significant changes to R&D tax reliefs have been introduced over the past two years, with a major shift which came into force from 1 April 2024. These changes won’t be felt immediately, but decisions made now could impact your eligibility and claim value. Investors are becoming more risk aware when dealing with R&D tax reliefs – sometimes disregarding them completely – and some tech companies face funding gaps.

Many businesses know about the changes, but it can be challenging to filter the noise and identify necessary actions. How prepared is your business for these changes, and how confident are you in continuing to access this funding? Here are the key changes you need to know about and how to prepare.

As your business scales quickly, R&D expenditure can ramp up, changing your risk profile. Submitting an R&D claim each year and receiving the cash from HMRC in a few weeks may give you confidence that HMRC thinks all is in order. However, those earlier claims may not have been reviewed at all by HMRC, because only a proportion of R&D claims are selected for detailed review.

HMRC has recently ramped up its compliance team, now checking around 20% of R&D claims, compared to 1% previously. Delay or uncertainty about receiving the amount claimed puts unwelcome pressure on cash flow and has very real consequences when meeting payroll and other financial commitments.  

If HMRC has not yet contacted you, now is the time to check your methodology and ensure you are enquiry ready. Waiting until the letter lands will put you on the back foot.

If you have recent experience of R&D claim enquiries, it is possible that you found it to be time-consuming and frustrating. You may even have had an R&D claim rejected by HMRC, leaving you unsure about making future claims. A rejection does not prevent you making another R&D claim, but anyone in this position should plan carefully. The right approach will depend on the outcome of your previous interaction with HMRC, as well as your sector, business stage, and ongoing R&D activities.

If you are responding to queries from HMRC, it’s vital to get the right specialist advice. The right adviser will draw on tax, technology, and disputes experience to guide you through the technical evidence to present, how to navigate HMRC’s procedures, when to escalate your case, and what to consider should you need to appeal. A number of companies have now pursued their cases through to the tax tribunal, but whether this is the right route for your business will depend on many factors, and it is not a recommended route for the underprepared.

Most younger tech businesses have historically claimed relief under the SME R&D scheme, offering funding up to 33% of R&D expenditure, with the option of a payable credit for loss makers. Companies had to monitor investments carefully, as holdings in other enterprises of more than 25% could result in losing SME status, leading to a lower level of relief.

The effective rate of relief under the SME scheme fluctuated with profitability but the policy was generally stable and well understood. This changed in Autumn 2022 when Chancellor Jeremy Hunt cut the SME scheme rate, reducing the effective rate from 33% to 19% from April 2023.

However, a higher rate of 27% was retained for loss-making R&D-intensive SMEs, requiring R&D spend to be at least 40% of total business expenditure. This threshold decreased to 30% from April 2024, bringing more businesses into scope. The rushed implementation of this higher rate has led to additional complexity and confusion.

From the same date, most businesses moved to the newly merged R&D expenditure credit (RDEC) scheme. All of these changes, and others, mean fast-growing tech businesses will face two to three years of instability, with 2023, 2024 and 2025 R&D claims likely differing from historic claims and each other.

In a landscape of change and complexity, fast-scaling businesses must ensure their R&D tax relief approach evolves with them.

Decisions made during scaling, investment seeking, or transaction preparation can impact R&D tax relief. Being proactive is crucial, as reversing actions later is often not possible. Integrated advice aligning tax considerations with business plans enables informed decisions and proactive risk management.

To effectively fund growth, R&D tax relief should be included in forecasts and investment decisions. Retrospective handling can be challenging, so more businesses are using technology for real-time tracking of R&D activities and spend. This helps measure returns on R&D spend and offers wider benefits like employee engagement and talent retention.

When seeking investment or preparing for a transaction, you may face detailed questions about your R&D tax relief approach. A submitted R&D claim or even money in the bank from a claim doesn't guarantee it's secure.

Engaging advisers for R&D claim preparation can manage risk, but due diligence is crucial. Professional tax advisers aren't formally regulated, but reputable firms are usually members of professional bodies with strict standards for expertise and conduct. Reliable advice will help you confidently address potential investor questions.

Ensure your claim preparation aligns with HMRC's expectations and maintain sufficient evidence and records. If a transaction occurs while a claim is pending or within the enquiry window, demonstrate that records are readily available for potential HMRC queries. An experienced R&D tax specialist can advise on appropriate records, extending beyond the R&D report itself.

At Evelyn Partners our specialist R&D team includes industry experienced software developers, scientists and engineers from a broad range of roles and sectors, ensuring we will truly understand your technology projects. We offer a vertically integrated team, leveraging expertise in tax, accounting, technology, transfer pricing and corporate finance to provide practical and proactive advice tailored to support your business.

Managing the risk of a potential HMRC enquiry is crucial. Our team is dedicated to helping you navigate these changes and take action to manage risk. If you have any questions about the points raised in this article, please get in touch with your usual Evelyn Partners contact or our team.

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