Taxing Times: What You Need to Know as 2025 Approaches

If your business is currently claiming Research & Development (R&D) tax relief, or plans to do so, it is essential for Chief Financial Officers (CFOs) and Finance Directors (FDs) to familiarise themselves with the latest changes.

Although the Chancellor left R&D Tax Credits untouched in the Autumn Budget, significant updates implemented earlier this year make it crucial to get the details right. ERA Group strongly recommends partnering with one of our carefully selected external R&D tax advisory consultants. These specialists ensure claims are technically robust before submission and provide expert support in the event of an HMRC enquiry.

What’s more, we’re astonished that our R&D panel continue to find non-compliant claims being submitted by competitors and by how often claims are being significantly under-valued.

So far in 2024, our R&D panel has recovered additional tax relief for ERA Group UK clients or have recoveries pending of more than £2million, across just five companies.

This raises the question: how many untapped opportunities still lie hidden within pioneering, industry leading, innovative companies?

A Brief Backdrop

The National Audit Office has reported that the level of risk and compliance work necessary for R&D relief had been underestimated by HMRC for years, resulting in a level of error and fraud estimated to be as much as 28% of claim values – representing more than £1.5 billion/annum.

As you can imagine, HMRC are tightening up – and rightly so. The number of staff working on risk-based  compliance increased four-fold in the last 18 months and the number of cases they opened rose by 627%. They have also given themselves more time to assess claims – a previous KPI of handline 95% of claims within 28 days has now been set to 85% of claims within 40 days.

Understanding and benefiting from R&D tax credits can be crucial for businesses, especially with recent updates and increased scrutiny from the government and its agencies.

Changes to R&D Tax Relief Schemes

For accounting periods commencing on or after April 1st 2024, there will be a unified rate of tax relief applicable to most R&D activities, known as the Merged Scheme – Research and Development Expenditure Credit (RDEC). While this means a reduction in tax relief for SMEs, the RDEC rate is increased from 13% to 20%, providing a benefit of 15% to 16.2% of qualifying R&D expenditure after tax. An exception is made for SMEs engaged in what is referred to as ‘intensive’ R&D, offering a more generous benefit of up to 26.97%.

It’s important to note that there have been no alterations to what qualifies as R&D.

Further Technical Changes

The following technical changes also take effect for accounting periods commencing on or after 1st April 2024:

• Subcontracted R&D: The contracting company can now claim tax relief for subcontracted work, whereas previously only the subcontractor could claim under the SME scheme. There will be more scrutiny on who the R&D decision maker is and whether the R&D was “intended and contemplated”.
• Handling of Subsidised Expenditure: SMEs will now benefit from a more generous treatment of subsidised expenditure (for example, grant funding), with tax relief no longer reduced.
• Focus on UK Activities: R&D relief is now refocused on UK activities, with certain exceptions, and Externally Provided Workers (EPW) costs are eligible only if subject to UK PAYE and NIC.

The Importance of Choosing a Reliable R&D Tax Credit Adviser

Given the numerous changes in R&D tax relief over the past year or two, the considerably more stringent compliance environment and coupled with the presence of some unreliable R&D advisers in the market, it has never been more critical to select a dependable R&D tax credit adviser.

At ERA Group, we have completed due diligence on a small panel of appropriately qualified specialists to ensure the right advisor is matched to each client depending on their unique needs.

Why not take advantage of our free R&D Tax Credit Audit and Compliance Check to not only ensure your company is staying on the right side of HMRC Guidance but to identify whether there are opportunities to unlock cash from understated claims in the last two financial years?

Contact us at least 3 months prior to your financial year-end to allow work to be completed and remedial actions taken before the right to amend your Corporation Tax return evaporates at financial year-end.

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