Finance Act 2024: Key Changes to R&D Tax Relief

The Finance Act 2024 has brought about significant changes to the UK's research and development (R&D) tax relief schemes. These changes primarily affect accounting periods beginning on or after April 1, 2024, so it's crucial for companies to understand how these updates might impact their existing and future claims. This post will provide an overview of the key changes.

Overview of R&D Tax Relief

Before diving into the specifics of the Finance Act 2024, let's briefly recap the R&D tax relief schemes available in the UK. Part 13 of the Corporation Tax Act 2009 provides tax relief for companies investing in R&D. Previously, there were two main schemes:

· R&D Expenditure Credit (RDEC): This scheme is generally for larger companies, providing a credit based on a percentage of qualifying R&D expenditure.

· Small and Medium-sized Enterprise (SME) Relief: This scheme offers enhanced deductions and a potential payable credit for eligible SMEs that are loss-making and R&D-intensive.

It's worth noting that Chapter 8 of Part 13 of the Corporation Tax Act 2009 places limits on the entitlements given by both the RDEC and SME schemes.

Key Changes Introduced by the Finance Act 2024

The Finance Act 2024 introduces a number of changes to the R&D tax relief landscape. Here's a breakdown of the most important ones:

Restrictions on Relief: Chapter 8 of Part 13 has been substantially revised, placing new restrictions on the relief available under both the RDEC (Chapter 1A) and SME schemes (Chapter 2). These restrictions aim to ensure the relief is targeted effectively and to prevent abuse.

PAYE and NICs Cap: A significant change is the introduction of a cap on the amount of R&D expenditure credit or R&D tax credit payable to a company. This cap is linked to the company's PAYE (Pay As You Earn) and National Insurance Contributions (NICs) liabilities. There are exceptions to this rule, but it's essential to assess potential impact. Sections 1058A-1058D, which previously addressed avoiding double counting of PAYE and NIC liabilities and exceptions to the tax credit cap, have been removed.

Example: Consider a software company that spends £500,000 on qualifying R&D and is claiming under the RDEC scheme. Let's say their calculated RDEC is £150,000. However, their total PAYE and NICs liabilities for the period are only £100,000. Under the new rules, their RDEC claim could be capped at £100,000 (subject to any exceptions that may apply)

Going Concern Requirement: To claim an R&D expenditure credit or SME relief, companies now need to be a "going concern" . This means that the company must be financially stable and able to continue operating for the foreseeable future. Section 1112F specifies conditions for companies making claims under section 1042C or sections 1044, 1045, and 1054, related to being a going concern.

Example: A biotech start-up is developing a novel drug. While they have significant R&D expenditure, they are reliant on securing a further round of investment to continue operating. If there is significant doubt whether that investment will materialise, the company might not be considered a "going concern," potentially jeopardising their R&D tax relief claim

SME Definition: The Finance Act 2024 includes amendments to the definition of "small or medium-sized enterprise" in section 1119, with references to sections 1120A and 1120B. Companies should review these definitions to confirm their eligibility for the SME scheme.

No Overlapping Claims: A company can't claim relief under the SME scheme (Chapter 2) if it's also claiming relief under the RDEC scheme (Chapter 1A) for the same expenditure.

Specific Section Amendments: Various sections of the Corporation Tax Act 2009 have been amended with words inserted, substituted or omitted. These changes may affect the conditions or calculations for relief. For example, words have been inserted in s. 1054(2), and a word in s. 1054(4) has been substituted. Section 1044 has also had subsections inserted and words inserted/omitted.

Example: Section 1062A now states that an insurance company that carries on life assurance business in an accounting period is not to be treated as a small or medium-sized enterprise in relation to that period. This means that insurance companies in this position will no longer be able to claim SME relief.

Impact on Existing Tax Relief Claims

The Finance Act 2024 will affect existing tax relief claims for accounting periods beginning on or after April 1, 2024. Companies need to consider the following:

· Review Eligibility: Reassess eligibility for either the RDEC or SME schemes based on the updated definitions and criteria.

· PAYE/NICs Cap: Calculate potential impact of the PAYE/NICs cap on the amount of relief receivable.

· Going Concern: Ensure the company meets the "going concern" requirement and can demonstrate its financial stability.

· Claim Preparation: Update claim preparation processes to reflect the changes in eligible expenditure and claim procedures.

· Record Keeping: Maintain detailed records to support claims and demonstrate compliance with the new rules.

Specific Examples of Changes

· Chapter 2 Amendments: The heading for Chapter 2 has been substituted to "RELIEF FOR LOSS-MAKING, R&D-INTENSIVE SMES".

· Section 1051: Words in section 1051 have been substituted.

· Section 1058: Various changes have been made to section 1058, including the substitution and omission of certain parts.

· Section 1062A: An insurance company that carries on life assurance business in an accounting period is not to be treated for the purposes of this Chapter as a small or medium-sized enterprise in relation to that period.

Conclusion:

The Finance Act 2024 introduces significant changes to the UK's R&D tax relief schemes. Companies should carefully review the new rules and assess their impact on existing and future claims. Seeking professional advice is recommended to ensure compliance and maximize potential benefits. The changes aim to refine the system, ensuring that R&D tax relief is targeted effectively and supports genuine innovation.

What the New R&D Tax Relief Rules Mean for Your Business — Are You Ready?

As mentioned above, the Finance Act 2024 introduces some of the most substantial reforms to the UK’s R&D tax relief landscape in years.

From 1 April 2024, businesses must navigate revised definitions, tightened eligibility, PAYE/NICs-based caps, and more stringent compliance requirements.

At LEXeFISCAL LLP, we help growth-focused businesses, innovative start-ups, and R&D-intensive SMEs adapt and thrive under complex tax legislation.

Summary of Key Changes You Must Know:

· New Restrictions: Chapter 8 of Part 13 CTA 2009 has been restructured, narrowing entitlement under both the RDEC and SME schemes.

· PAYE/NICs Cap: A tighter link between your claim and the company’s PAYE/NIC liabilities, with the repeal of ss. 1058A–1058D.

· Going Concern Test: Companies must now meet the “going concern” requirement under s. 1112F to be eligible for relief.

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