The new financial year is here – which signals a big change for R&D tax relief.
For accounting periods starting on or after 1st April 2024, the SME and RDEC schemes will be replaced by a single, merged scheme with new claim processes and updated rates.
R&D tax relief remains a leading strategic growth initiative for ambitious businesses looking to scale, but new processes mean new rules, and without a comprehensive understanding of these changes, SMEs could jeopardise their ability to claim.
With such a big shift imminent, companies need to act now. Here are five top tips for SMEs looking to take advantage of the new merged scheme on how to keep their claim compliant and to ensure they’ve optimised their return.
Assess your eligibility
Amid all the change, remember that not all SMEs will follow the same path to claiming R&D tax relief. For example, businesses that invest heavily in R&D can benefit from the Enhanced R&D-Intensive Support (ERIS), designed to reward innovation. If your relevant R&D expenditure accounts for at least 30% of your total costs, you could qualify for ERIS and get a tax reduction of up to 27%.
To understand if this is the right path for you, start by reviewing your accounts for the current accounting period to check if your R&D spending meets the 30% threshold. If you’re close, consider strategic steps like bringing forward planned R&D activities or reviewing eligible costs to help ensure you qualify.
However, ERIS isn’t right for everyone. The benefit it offers can vary significantly depending on your trading losses, potentially dropping to a tax reduction of just 12.5% for those with lower losses, compared to the 16.2% provided by the merged scheme.
Sometimes, you can even combine both for a better return – but if you’re not sure, seek out expert advice.
Factor in the lower rates
A big change that needs to be front of mind is that some businesses will get less back under the new merged R&D scheme. This follows on from the decline seen in 2023 when the usual 33% rate for loss-making SMEs dropped to 18.6%. Now, businesses face another reduction under the merged R&D scheme to between 14.7% – 16.2%.
For SMEs that relied on R&D tax relief for cash flow, this means less funding to reinvest in innovation. It’s important to therefore update your financial forecasts so you don’t get caught out by lower returns. Also, check your effective relief rate; if your claim size or financial position has changed, reassess which scheme is best for you.
In the meantime, if R&D tax relief was a key part of your funding strategy, it’s worth exploring grants or alternative finance solutions to bridge the gap.
Don’t forget about your overseas R&D
Did you know that HMRC is tightening the rules on overseas R&D spending? Now, subcontracted R&D and Externally Provided Workers (EPWs) must be UK-based to qualify, unless they meet specific exceptions.
So, if your innovation relies heavily on overseas talent, you could face a drop in your R&D claim this year. In the long-term, it might be worth reviewing your R&D supply chain to see if it’s worth relocating work to the UK.
At the same time, take a close look at HMRC’s new exemption rules to see if any overseas work you’re conducting still qualifies. Planning ahead could make all the difference.
Keep on top of the Claim Notification rule
Far more than another admin task, Claim Notifications have a hard deadline of six months after your accounting period. Several companies have already been caught out by missing it. If you don’t notify HMRC in time, you won’t be able to claim R&D relief – no exceptions.
Those who need to be aware of this rule are first-time claimants, companies that haven’t claimed in the last three years, and those amending a tax return that includes an R&D claim for an earlier period (if the amendment was made on or after 1st April 2023).
It’s easy to think you wouldn’t forget something so important, but you’d be surprised! There are many steps to an R&D tax credit claim, it doesn’t take much for something to fall off the radar. Set a calendar reminder now, get your project details and financials in order, talk to an R&D tax specialist if you’re unsure about anything – don’t leave anything to chance.
Stay organised!
HMRC is upping its scrutiny on R&D tax credit claims. Given 20% of all claims receive an enquiry – plus the added risk from the Mandatory Random Enquiry Programme (MREP) – businesses need to get their records straight. Poor organisation puts your claim at risk of delays or rejection.
To meet HMRC’s requirements, you must provide a detailed breakdown of R&D costs and explain how your projects resolved technical uncertainties to advance science or technology. Businesses should make use of the new Additional Information Form (AIF) – alongside a claim report – to strengthen their case.
Here are a few extra tips to help make your claim stronger:
• Record R&D activities in real time to avoid end-of-year guesswork
• Accurately log and justify all claimable expenses
• Write a clear technical narrative showing how your work resolves uncertainty
• Use R&D tracking tools or professional advisors to keep records audit-proof
Taking the right approach now protects your claim, your funding, and your business. Stay compliant, stay informed and don’t leave money on the table.