Business Tax and R&D Tax Changes

From April 2024, businesses of various types could be affected by the business tax and R&D tax changes introduced by the Government.

For businesses themselves, the impact of these changes depends on a number of factors: their sector, their size, and their setup.

For accountants, accounting practices and bookkeepers, it’s vital that these changes are understood to maintain accuracy in client accounts and tax returns.

Here’s what you need to know.

Overview of Recent Business Tax Changes

In his Spring Budget of 2024, Jeremy Hunt announced that corporation tax rates would remain unchanged. However, the main rate of employee NICs was cut from 10% to 8% from April 2024, while the main rate of self-employed NICs was cut from 8% to 6% from the same date.
The VAT threshold was increased from £85,000 to £90,000 from April 1st in a bid to stimulate economic growth. It was also announced that full expensing would be extended to leased assets, potentially providing businesses with further tax relief.

Further tax reliefs were introduced for the creative and cultural sectors to strengthen these industries, and the Energy Profits Levy was extended until March 2029.

Understanding R&D Tax Relief Changes

The Government is looking to increase investment—both public and private—in R&D. Tax reliefs are an important way of reducing innovation costs and increasing investment in R&D, and the new R&D tax changes that come into force this April are designed to increase spending on R&D and combat errors and potential misuse of the reliefs.

From April, the two former schemes – the SME scheme and the RDEC scheme – have been merged. In essence, the SME scheme has been abolished, and the two have been replaced with a slightly modified version of the old RDEC scheme.

For the majority of businesses – regardless of size – the merged scheme will offer a credit rate of 20% on all qualifying expenditure. This is significantly lower than the previous SME scheme, but matches the RDEC scheme.

There are also changes for loss-making R&D-intensive companies. Previously, a company was considered “R&D intensive” if R&D made up 40% of their business. This threshold has now been lowered to 30%.

However, this is not all that has changed. The definition of “qualifying expenditure” has shifted – and while it does now include some extra elements (such as cloud computing costs), other elements (like overseas subcontracting expenditure) have been removed.

Documentation requirements have also changed. R&D tax relief claims must now be submitted digitally. These claims should also include additional information, such as a detailed breakdown of R&D expenditure types. This will help HMRC to conduct risk assessments and judge the accuracy of claims.

For accountants and bookkeepers, understanding these R&D tax changes is vital to maximise the benefits for your clients. Clients in sectors like technology and manufacturing, in particular, may find that they benefit more significantly thanks to their heavy investment in UK R&D.

Impact of Tax Changes on Accounting Practices

If you are responsible for the day-to-day bookkeeping or the annual accounts for a client, the onus is on you to keep your clients compliant.

As their trusted professional partner, they will expect you to stay abreast of any tax-related changes that could affect their business. Whether it’s changes to VAT thresholds, increased reliefs for particular sectors or major R&D tax changes, your clients are relying on your business tax expertise to not only keep them compliant but also to take advantage of any legal ways to reduce their tax liabilities.

If you find it challenging to stay up-to-date with industry changes, we’re here to help.

Why Join ICPA: Benefits for Accountants and Bookkeepers

Here at the ICPA, we’re passionate about the success of our members. Join over 1,000 professional bookkeepers and accountants who enjoy a varied range of member benefits, including dedicated telephone advice lines; extensive and exclusive information, support, guidance and analysis of aspects of the industry; and plenty of networking and professional development opportunities.

The world of business tax is one that is constantly shifting and evolving – and it’s vital to stay up to date to keep your clients compliant, as well as tax-efficient. You need not navigate these changes alone, though. Join us and enjoy a support network designed by accountants, for accountants, helping you to handle industry changes with ease.

FAQs on Business and R&D Tax Changes

How do the recent R&D Tax Relief changes affect the claims process for our clients?

The new changes are designed to reduce error and abuse and also include a number of key amends. This means that client R&D activities should be examined closely to ensure they are aligned with the new rules and that they have the required documentation.

Are clients’ overseas R&D activities still eligible for tax relief under the new rules?

The relief on overseas R&D activities has now been restricted. Instead, HMRC is hoping to prompt greater R&D expenditure on UK-based activities.

How have qualifying expenditures for R&D Tax Relief been updated?

The definition of qualifying expenditure has expanded to include elements like data and cloud computing costs. Your clients should be informed of these changes to ensure they maximise their claimable amounts.

How can we determine if a client’s R&D activities qualify under the new guidelines?

By reviewing your clients’ R&D projects against the updated guidelines, focusing on the nature of the innovation and the client’s UK-based activities, you can help them to ensure eligibility for their claim.

Will the R&D Tax Credits changes affect certain sectors more significantly?

Yes. Sectors that invest heavily in UK-based R&D – like technology and manufacturing – may well enjoy more significant benefits as a result of the changes that have been made.

What steps are being taken to prevent abuse of the R&D Tax Relief scheme?

By requiring claim submissions to be digital and by streamlining the two previous schemes, HMRC is making it easier to clamp down on fraudulent activity. In order to comply with the new measures, clients must submit even more detailed documentation with their claims – to ensure a smooth process and to avoid being penalised.

What should we do if unsure about a client’s eligibility under the new R&D Tax Relief rules?

In this situation we would recommend seeking professional tax advice or consulting with R&D tax specialists. These experts can help you to confirm whether client activities qualify under the new rules, ensuring they can maximise their potential claims.

How do the changes align with the government’s innovation and R&D strategy?

These changes align with the government’s focus on UK-based R&D. Introduced in a bid to drive both innovation and investment within the UK, these changes also have the added benefit of potentially reducing fraudulent and error-laden activity.

If you would like to find out more, simply contact one of our friendly staff at ICPA, and we will respond as soon as possible.