Over the past two years, there's been an unprecedented increase in HMRC scrutiny and compliance checks into research and development (R&D) tax claims. This has mainly discouraged small and medium-sized (SME) claimants due to the cost-benefit ratio of defending a claim, which can be lengthy and drawn-out, creating uncertainty on cash flows.
Investors have become more selective in their investments due to lower growth across AIM-quoted businesses and the increased potential for HMRC scrutiny into previously submitted R&D claims may prompt caution. This is relevant to AIM-quoted companies (or those considering an IPO) raising new investment or refinancing. We're seeing investors question whether R&D claims should be discounted for the purpose of agreeing the net cash and asset position of businesses on transactions.
This can be particularly problematic if there's an open HMRC compliance check as it can delay transactions, and also raises the risk of discovery powers being exercised into earlier returns, penalties, and interest. This highlights the need for businesses to have robust documentation in place for their R&D claims, to minimise the risk of a lengthy and disruptive enquiry.
Understanding the recent updates to R&D tax incentives is crucial for AIM-quoted companies to ensure they're optimising the tax benefit opportunities and reassuring investors around risk.
Reforms to research and development schemes
As part of the reforms to the R&D tax incentives, two new schemes have been introduced for accounting periods starting on or after 1 April 2024 to replace previous ones: the enhanced research and development scheme (ERIS) and the merged research and development expenditure credit (RDEC).
Enhanced research and development intensive scheme
ERIS is available to loss-making R&D intensive SMEs, and offers a more generous cash benefit than the merged RDEC scheme (27% of R&D expenditure, subject to having sufficient surrenderable losses).
In order to qualify for ERIS, it's necessary to look at whether the required rate of R&D intensity is met (broadly 30% of all revenue costs on a group basis).
It's crucial to model the potential cash flow and accounting treatment of any scheme changes. Key actions will be to consider:
- the new contracted-out rules which determine claim entitlement where R&D is undertaken as part of a customer and contractor relationship
- the restriction to overseas expenditure in respect of contracted-out R&D and externally provided workers
- the extension in the scope of eligible expenditure to include certain data licences and cloud computing service costs that directly contribute to R&D activities (note that data licences and cloud computing costs are applicable for accounting periods starting on or after 1 April 2023).
Research and development expenditure credit scheme
The new merged research and expenditure credit (RDEC) scheme is applicable to all claimants unless the ERIS applies.
It offers an above-the-line R&D credit for all companies – which equates to a net cash benefit of at least 15% of the R&D expenditure (20% gross credit typically taxable at 25% corporation tax). While this offers greater visibility of the R&D credit in companies’ accounts, it represents a reduction in benefit on the previous SME scheme.
Additional administrative requirements
AIM-quoted businesses may already be managing complex operational and financial structures, with finance leadership stretched between strategic and compliance responsibilities. The requirement to submit a digital additional information form (AIF) containing significantly more information for a valid claim has only added to the administrative burden since its introduction in August 2023.
There are also new rules that may require advance notification to HMRC of the intention to make a claim. Some potential new or existing claimants therefore may miss out due to a six-month post-year-end deadline to notify or require specialist advice to navigate the new reporting requirements.
What can AIM-quoted companies do now?
Strengthen governance and documentation
Enhance internal processes and governance around R&D claims to prepare for increasingly rigorous HMRC reviews. For AIM-quoted companies, where transparency and investor confidence are paramount, maintaining comprehensive, contemporaneous documentation of R&D activities and associated costs is essential. A well-documented claim not only reduces the risk of protracted HMRC enquiries (which can disrupt cash flow and delay funding rounds) but also demonstrates robust financial discipline to the market.
Ensure the changes are reflected in your operations
Under the new rules, claiming relief for contracted-out R&D depends on who initiates and controls the work. It’s critical to structure contracts carefully and retain clear evidence of decision-making authority. Whether significant project expenditure qualifies can be an ‘all or nothing’ outcome, so it’s vital that key stakeholders across finance, technical, and operational teams understand the changes.
Don’t miss claim notification deadlines
Consider whether it's necessary to submit a claim notification form within six months of the relevant year-end to preserve eligibility for a future claim – building this into your year-end process is crucial to avoid an unwanted surprise.
The evolving R&D tax regimes present both challenges and opportunities. Businesses should review all aspects of their claim processes and ensure claims are underpinned by a reputable adviser (disclosed on the AIF), to help manage risk and anticipated cash flows. A new advance assurance scheme, is currently under consultation, so this may provide some welcome certainty for certain AIM-quoted businesses in the future, however compliance checks are expected to be maintained in the short-medium term but could become more focused.
For more insight and guidance, get in touch with Ian Rowland.
Learn more about how our Research and development tax incentives services can help you
