Research & Development (R&D) Tax Relief Changes & Contracts

If you are a company undertaking qualifying R&D activities or may do so moving forward, and you intend to claim R&D tax relief on these costs, there have been important changes introduced that you should be aware of.   Historically and recently, companies undertaking qualifying R&D activities have been able to claim additional and enhanced tax relief and tax repayment credits under one of two R&D schemes.   

1. The SME scheme – Available for companies under a certain size whose R&D activities and costs have been self-funded.   This has been the more generous of the two schemes.  
2. The RDEC scheme - Available for larger companies or SME companies whose R&D costs have been subsidised, typically by grant or customer funding.  

New R&D Schemes

For accounting periods commencing on or after 1 April 2024, a new merged R&D scheme will replace the SME & RDEC schemes for the majority of R&D claimant companies.  Some loss-making SME R&D companies may be eligible to claim R&D tax relief under a more generous R&D intensive scheme instead however, this will depend on individual circumstances and meeting certain criteria.

Significant Changes

Subcontracting and Claiming R&D Tax Relief

One of the most significant changes within the new schemes is the clarification in respect of who can claim R&D tax relief when subcontracting R&D work, or being subcontracted to undertake the R&D work:

• Historically, the contractor company would usually have been the party claiming the R&D tax relief unless the contracted company could demonstrate the contractor had no expectation or necessity for them to carry out the R&D work as part of their engagement.  This often led to ambiguity and uncertainty, and sometimes both companies attempting to claim R&D tax relief for the same project costs.
• Under the new R&D schemes, it is only the company leading the R&D activities, financing the R&D costs and undertaking the risk that will be able to claim the R&D tax relief.  This could still potentially create ambiguity in some circumstances.

It is more likely moving forward that HMRC will scrutinise R&D documentation and practices to establish who may be able claim the R&D tax relief.

Recommendations

To help avoid this future ambiguity and mitigate risk in this area:

• Review of R&D Contracts:  We recommend that companies review their customer and supplier contacts where R&D could be relevant.
• Inserting R&D Clauses: Where possible, consider inserting an R&D clause which clearly stipulates which party may claim the relief.  If contracts already exist, it may be worth considering including an addendum, to clarify who may be able to claim the R&D tax relief.    

Failure to address this now could in a worst-case scenario, result in HMRC denying companies very significant amounts of R&D tax relief, so it is important this is considered as a matter of urgency.  

Legal Advice

As contract drafting is a legal area, we will be happy to refer you to a trusted solicitor should you need legal advice or contract work undertaking due to the changes.  

Contact Us

If you’d like to discuss the changes or anything else regarding R&D tax relief, including whether you may be able to claim or proactive planning advice in this area, please do not hesitate to contact Kay Oldham (kay.oldham@teamjs.co.uk) or Rory Fothergill (rory.fothergill@teamjs.co.uk)  in our R&D tax advisory team.  

Our R&D tax advisory team is here to help with any queries or guidance you may need.