As we welcome the changes to R&D tax credits for the 2024-25 financial year we can see that as with the 2023 budget changes the rules and regulations have evolved yet again. It is important to be mindful of the R&D tax credit restrictions that are now in place as you carry out all research and development (R&D) projects so that you can estimate what R&D tax credits you are eligible for. 

Below we have outlined a number of R&D tax credit restrictions that may apply to you or your business when submitting your tax credit claim later in the financial year.

R&D PAYE Cap

The PAYE cap has been part of the R&D tax credit restrictions since 2021 when it came into play. Usually, staff costs do qualify for R&D tax credit relief however, there is now a cap in place for how much you can claim back.

SMEs have the option to receive a refundable tax credit, which is limited to 300% of their combined payments for pay-as-you-earn (PAYE) and National Insurance contributions (NIC) ; there is also a £20,000 buffer. The cap means that your R&D tax credit relief will not exceed £20,000 plus three times the amount you spend on PAYE and NIC.

This means that smaller businesses that have lower payroll expenses will be impacted by how much they can receive from R&D tax credit relief under the PAYE cap as they can now only claim three times the amount they spend on staff costs.

The PAYE cap also prevents loss-making companies from receiving R&D tax credits they would have been able to claim in the past. 

Similarly, if your business subcontracts workers then you will also be impacted by the PAYE cap as without costs spent on staff you can only receive the £20,000 buffer.

A business may find themselves exempt from the PAYE cap if any of the following apply:

Notifying HMRC About Your R&D Tax Credit Claim

Another R&D tax credit restriction that may impact your R&D claim time limit is that HMRC won’t accept your first R&D claim if you don’t notify them of your intention to make an R&D claim in that financial year. This only applies if you are claiming under RDEC rates. Or the SME scheme for the first time since the 2023-24 tax year or if you have not claimed in the last 3 financial years. This rule is likely to also apply to the new merged R&D scheme coming into effect in the 2024-25 financial year.

To notify HMRC of your intention to make an R&D tax credit relief claim there is an online form available to complete and submit. This must be completed at least 6 months from the end of the accounting period in which you want to make your claim.

If you have already claimed in the last 3 financial years then you are not required to notify HMRC of your intention to claim.

Providing Additional Information To HMRC

Failing to provide additional information to HMRC is another R&D tax credit restriction that will impact your R&D claim time limit.

Introduced in the 2023-24 financial year, all businesses must now provide an additional information form alongside their application for R&D tax credit relief regardless of the size of their business for both the RDEC and SME R&D Schemes and later for the merged R&D scheme that comes into effect in the 2024-25 financial year.

This additional information must be submitted before your corporation tax return as HMRC will be unable to handle the claim without them.

The additional information you need to provide HMRC with includes:

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R&D Tax Credit Restrictions On Qualifying R&D Activities

Not all R&D activities qualify for R&D tax credit relief, usually, the activities must involve technological innovation, scientific research or the development of new or improved products, processes or services. 

Routine activities, distribution of goods and services, market research and administration tasks do not qualify for R&D activities as they do not contribute to the resolution of scientific or technological issues. It is therefore crucial to analyse any qualifying R&D activities to make a risk-free claim and ensure that this R&D tax credit restriction doesn’t impact your R&D claim time limit.

Suitable Evidence Of Eligibility

All businesses are required to provide suitable evidence of their R&D activities via detailed documentation. This includes project plans, technical documentation, test results, evidence of costs and any other relevant supporting documentation. 

Having insufficient evidence or poor documentation of your R&D project or activities can lead to further enquiries from HMRC or the denial of R&D tax credit claims upon auditing. This R&D tax credit restriction can impact your R&D claim time limit if not adhered to correctly.

Overseas R&D Activities Or Expenditure

Currently, any R&D costs accrued by R&D activities taking place outside of the UK by a UK-based company will only be eligible for an R&D tax credit claim if the activity cannot be replicated in the UK. This R&D tax credit restriction comes into effect as of April 1st 2024 and will continue indefinitely into the 2024-25 financial year.

What Is The Purpose OF R&D Tax Credit Restrictions?

The main reason why HMRC has R&D tax credit restrictions in place for all businesses is to enable them to turn their attention to genuine innovation and high-impact research that aids scientific and technological discovery. By implementing various caps and compulsory documentation HMRC is attempting to prevent the R&D incentives from being abused by increasing the transparency of projects.

How Can CapEx Tax Help Your Business Find Its Way Around R&D Tax Credit Restrictions?

Having R&D tax credit restrictions to consider before beginning an R&D project or activity can be stressful and can cause additional work to do before making an HMRC claim. Our team of tax specialists at CapEx Tax can talk you through your claim and take a look at the documentation that you plan to provide to HMRC to ensure that it is likely to be approved and that you are going to be eligible to receive your R&D tax credit relief claim within the upcoming financial year. Contact us today to discuss your claim further and see how we can help you during the claims process.