Brokers and MGAs investing in software that is new, improving a process or addressing an uncertainty could benefit from R&D tax relief

According to this year’s Spring Budget, presented by the chancellor of the exchequer Jeremy Hunt on 6 March 2024, a new research and development (R&D) tax relief scheme is set to be implemented by the UK government in April 2024. 

This will merge the previous R&D expenditure credit (RDEC) and the enhanced R&D intensive support (ERIS) schemes into a singular programme.

The RDEC is currently aimed at larger firms, while ERIS applies to small and medium-sized enterprises (SMEs), insurtechs and startup brokers. The new combined scheme will come into play for accounting periods beginning on or after 1 April 2024.

While HM Revenue and Customs (HMRC) intended to simplify R&D tax relief after a recommendation from the House of Lords in February 2024, the impact of merging the two existing R&D schemes is yet to be seen.

Tom Jones, director of tax credit consultancy ForrestBrown, told Insurance Times: “The companies first to be impacted will be those with a March [financial] year-end, as these firms will need to consider the impacts of the merged scheme and how it impacts R&D claims.”

R&D tax credits enable firms that work on technology or science-based projects to recoup capital via a corporation tax relief. This can provide a vital financial boost to insurtechs, startup brokers and SMEs.

“Historically, R&D had always been viewed as a retrospective activity,” Jones explained, whereby firms review work they have undertaken in the last year or two.

“But now firms will need to consider how the merged scheme impacts claims moving forward,” he continued.

Jones added that for larger firms, the impact of the merged programme will be ”mainly positive,” although some restrictions will be implemented.

For example, larger firms that previously may have tapped their global workforce to contribute to UK R&D projects will now be at a disadvantage because from 1 April 2024, overseas expenditure towards R&D projects will be restricted, meaning that firms can now only claim R&D tax relief for activities that occur in the UK.

Tightened approach

The Spring Budget also proposed several other measures around R&D, such as the introduction of a new R&D advisory panel, aimed at supporting the administration of this tax relief.

Jones said: “We’re yet to have detail in terms of what that looks like, but it will be a positive step forward because if you get the right advisors involved, then it could help with this strategy and the ongoing consultation of the R&D scheme.”

Previously, an HMRC R&D committee was in place, which anyone could attend.

ForrestBrown, which was founded in 2013 to support UK businesses with this tax relief, hopes that the advisory panel will “shape strategy and the next evolution of UK R&D”.

This creation of an advisory panel was just one of the changes implemented by the government to reduce “erroneous claims” in R&D tax relief, according to Justine Dignam, director of incentives and reliefs at Markel Tax. She noted that “HMRC estimates that up to half of R&D claims are non-compliant”.

Last year, the UK Treasury tightened its approach to R&D following the publication of HMRC annual report and accounts 2022 to 2023 on 17 July 2023. This estimated that error and fraud in R&D totalled losses of £1.13bn between 2020 to 2021 across all sectors of the economy.

This finding prompted a 12-week consultation, which launched on 6 March 2024, to explore standards in the tax advice sector. 

Other changes around R&D tax relief confirmed in the Spring Budget included the creation of an additional information form for R&D claims submitted on or after the end of August 2023.

Furthermore, firms wishing to claim R&D tax relief going forwards will now need to pre-notify HMRC of the intention to make a claim if they have not made one before, or within the last three financial years.

Insurtechs and startup brokers that are unaware of these changes could, therefore, miss out.

“That can be a deterrent, but it’s also an awareness piece whereby companies [that] are early stage need to have a broad awareness of R&D, what they can claim and the pre-notification that six months after their financial year-end, HMRC will need to be notified,” Jones continued.

“Raising awareness of R&D over the course of the next six to 12 months is going to be key [to combat firms that] shouldn’t be eligible [but] are benefiting from it.”

Cracking down on fraud 

Dignam warned that as HMRC is also currently focused on reassessing previous successfully paid R&D claims, many firms may not realise that incorrect or fraudulent claims could warrant imposed interest and repayments, for example.

“HMRC is likely to review previous submissions from that claimant with potentially disastrous consequences for the company involved,” Dignam said.

“Our own thinking at Markel Tax is that last year’s changes, far from making R&D more streamlined and fair, have in fact done the opposite.

”We now have more schemes and more complexity, which means many claimants will be unsure about what they now should be claiming and what rates are applicable to them.”

Dignam additionally shared concerns that the level of tax relief available to SMEs for R&D is “substantially lower than it has been and whether it is fair that all companies, regardless of size, are now effectively entitled to the same level of relief for their investment in R&D.” 

She added that the numerous changes to R&D tax relief will require “additional technical project management” to be submitted to HMRC.

“Whilst this can place an extra burden on smaller companies relative to their larger counterparts, Markel Tax welcomes what we see as a change that will deter less qualified R&D claims advisors who have not helped many of those claiming to stay within the spirit of the R&D claims criteria. This issue was arguably the main drive behind the recent government changes,” Dignam said.

Markel Tax is seeing more insurance brokers and MGAs investing in innovative software projects that are creating something new, significantly improving a process, or addressing an uncertainty that software to date has failed to solve.

Dignam noted that it is “important” for those looking to claim R&D tax relief that they are meeting one of these three criteria.