As a key incentive for businesses engaged in innovation, Research and Development (R&D) tax relief has provided valuable support for companies across the UK for years. However, the landscape is shifting. Starting from 2025, the UK government is introducing significant changes to the R&D tax relief system that companies need to be aware of in order to maximise their claims.
For accounting periods beginning on or after 1 April 2024 (with a year-end of 31 March 2025 or later), companies will now access R&D tax relief through one of two revised mechanisms: the new Research and Development Expenditure Credit (RDEC) or the Enhanced R&D Intensive Support Scheme (ERIS).
What You Need to Know About R&D Tax Relief in 2025
The New RDEC & ERIS: A Shift in R&D Tax Relief
The new RDEC will apply to all companies conducting qualifying R&D activities, offering tax relief of up to 15p-16p for every £1 spent on qualifying R&D expenditure. On the other hand, the ERIS is targeted at loss-making R&D-intensive SME companies, which could see up to 27p in every £1 spent on R&D. Companies will need to understand which scheme they are eligible for, as both have distinct criteria and eligibility conditions.
Grants and Subsidies: Simplified Rules
Historically, the relationship between R&D grants, subsidies, and R&D tax relief was complex, especially when grant funding was involved. However, the new rules now allow companies to claim under the new RDEC or ERIS scheme, even if their R&D projects have been grant-funded. This change reduces administrative burdens and ensures greater clarity for companies, especially those relying on grants alongside R&D tax relief.
Overseas R&D Expenditure: Stricter Rules
The previous allowance for tax relief on overseas R&D expenditure is being tightened. From 1 April 2024 onwards, companies will no longer be able to claim tax relief for overseas subcontractors or externally provided workers unless they can demonstrate that undertaking R&D outside the UK is necessary due to geographical, environmental, or regulatory conditions. This reinforces the UK government’s push to incentivise domestic R&D activities.
Contracted-Out R&D: Clearer Ownership and Rights
If your company undertakes R&D in collaboration with customers, the question of who owns the R&D work – and therefore who can claim the tax relief – has become more defined. The new legislation clarifies that if a customer intends or contemplates R&D as part of their engagement, they may claim ownership. It’s essential for companies to maintain clear agreements and thorough documentation to support their claims for ownership.
Above-the-Line Tax Credits: A New Approach
With the end of the old SME incentive, businesses must now familiarize themselves with the new RDEC structure, which includes above-the-line tax credits. Under the new system, companies will receive a tax credit equal to 20% of qualifying R&D expenditure. This tax credit will be recognised as income in the profit & loss account and can offset corporation tax liabilities, or be paid as a cash credit in some instances.
For SME companies, this shift may result in a lower rate of tax relief than before, but it will help strengthen financial statements by being recognised as income.
HMRC Compliance Measures: Increased Scrutiny
HMRC has ramped up compliance measures for R&D tax claims, and companies will need to navigate these with care. For example:
- Pre-notification Requirement: Companies making their first R&D claim, or those who haven’t claimed in the past three years, will need to notify HMRC within six months after the end of the accounting period in which the R&D took place.
- Additional Information Form: Companies must provide detailed technical and financial information relating to their R&D claims, including subcontractor details and key contacts. Failure to submit this form could result in the claim being rejected.
With increased HMRC investigations and stricter reporting requirements, it is essential for businesses to ensure they are in full compliance with the new rules to avoid missing out on claims or facing challenges from HMRC.
How TAXCA Can Help
Navigating the updated R&D tax relief system in 2025 may seem daunting, but TAXCA Accountants Ltd. is here to support your business every step of the way. Our expert team can help ensure you’re maximising your R&D tax relief claims while staying compliant with the new regulations.
We can:
- Advise on eligibility for RDEC or ERIS
- Guide you through the process of claiming tax relief, including handling grant funding and international R&D
- Assist with the preparation of the necessary forms and reports to meet HMRC’s compliance requirements
- Help you understand the implications of above-the-line tax credits on your financial statements
Contact us today to discuss how we can help you navigate the new R&D tax relief landscape and ensure you make the most of these valuable incentives.