Navigating the R&D Tax changes in 2025

A series of major R&D tax reforms were introduced in the UK from April 1st 2024.

Although these changes came into place last year, most claimants will be navigating these changes for the first time during 2025.

In this article we discuss key changes regarding the new rules and their implications.

New Merged scheme:The newly introduced Research and Development (R&D) Tax Relief Merged Scheme combines the existing Small and Medium Enterprise (SME) and R&D Expenditure Credit (RDEC) schemes. Announced in the Autumn Statement of 2023, the merged scheme takes effect for accounting periods starting on or after April 1, 2024. The merged R&D expenditure credit is largely based on the old RDEC scheme, offering eligible businesses an above-the-line credit worth 15% to 16.2% of their qualifying expenditure. The previous SME scheme was worth up to 21.5% of qualifying expenditure, so the merged scheme does represent a reduction in R&D tax relief for those previously claiming under the SME scheme.

Overseas contractors:A fairly significant change is the restriction on overseas costs for R&D tax claims. Starting from the 1st of April 2024, expenses related to overseas subcontractors and externally provided workers (EPWs) will no longer be eligible for R&D tax credits, provided the work is conducted outside the UK. The key requirement is that the R&D activities must be carried out physically within the UK, regardless of the nationality of the subcontractor or EPW.

Changing eligibility on subsidised projects:The government has lifted restrictions on claiming R&D tax relief for subsidised projects, effective from accounting periods starting on the 1st of April 2024. Prior to this, SMEs could only claim relief on subsidised projects under the RDEC scheme, which provided less generous relief than the SME scheme. With this change, the way a project is funded no longer affects the amount of relief a business can claim, for example, an R&D project where a business has received grant funding.

Intensive R&D scheme:The Enhanced R&D Intensive Support scheme (ERIS) provides a higher R&D tax credit rate of 14.5%, potentially offering up to 27% back on qualifying R&D expenses. This enhanced tax relief is aimed at supporting R&D-intensive companies, helping them sustain their innovation efforts. The merged R&D expenditure credit is largely based on the old RDEC scheme, offering eligible businesses an above-the-line credit worth 15% to 16.2% of their qualifying expenditure. To be R&D intensive from April 2024, a company needs to invest at least 30% of their total expenditure on qualifying R&D costs.

To claim Intensive R&D tax relief for SMEs, your company must be:

• An SME business
• Unprofitable
• R&D intensive by meeting the ‘intensity condition’

Subcontracted R&D:The new guidance clarifies that the right to claim R&D Tax Relief rests with the company that decides to undertake the R&D, whether under the merged RDEC scheme or the enhanced R&D intensive support. While subcontractors or contractors may sometimes be eligible, the claim depends on whether the work qualifies as contracted-out R&D. This change ensures the relief targets the businesses making the R&D investment decisions, which aligns with the scheme's goal of reducing the risks and costs of innovation.

The new guidance addresses relationships between:

• A customer – the company that outsourced work to a third-party
• A contractor – the company that performs the outsourced work

In the legislation, the term ‘subcontractor’ refers to work performed on behalf of a contractor. However, in reality, people use subcontractor to mean contractor.

Now, the customer/claimant is eligible for relief if the development work qualifies as ‘contracted out R&D’. To do this, it must pass three tests:

• Test 1: There must be a contract between the two parties
• Test 2: The contractor must undertake qualifying R&D
• Test 3: The customer ‘contemplated or intended’ the need for R&D

Prior notifications:As of the 1st of April 2023, businesses must now notify HMRC of their intention to make an R&D tax credit claim within six months after the end of the relevant accounting period. The intention of implementing this rule is to deter last-minute claims. It is important to note that there are various exceptions to this, for example, if a company has claimed R&D tax credits in the past three years.

The notification must include a brief summary of the planned activities to demonstrate it meets relevant R&D criteria, however detailed documentation isn’t required at this stage. To submit a prior notification, follow this link – https://www.gov.uk/guidance/tell-hmrc-that-youre-planning-to-claim-research-and-development-rd-tax-relief)

For more information on R&D or how we can help you and your business, please contact us via email or call and we will be happy to advise on the best solutions for your business.

Please note: This article is provided for information only and was correct as at the time of writing (14/01/25). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.