In April 2024, the UK government introduced the most significant overhaul of Research and Development (R&D) tax relief in over a decade. For small business owners, especially those investing in innovation in the Milton Keynes area, it’s essential to understand how these changes may affect your eligibility, claim process, and potential benefits.
Whether you’re developing new products, improving processes, or investing in software, expert Graeme Fox explores both the opportunities and challenges.
A unified scheme replaces SME and RDEC
The most notable change is the merger of the two previous R&D tax relief schemes: the SME (Small and Medium-sized Enterprise) scheme and the RDEC (Research and Development Expenditure Credit). These have been replaced with a single, unified scheme for accounting periods starting on or after 1 April 2024.
Under this new structure, the typical benefit for profitable companies is around 15% to 16% of qualifying R&D expenditure. While this is less generous than the old SME scheme, it simplifies the system and aims to make it more transparent. Importantly, the government has preserved enhanced relief for “R&D-intensive” SMEs—companies that spend 30% or more of their total costs on eligible R&D activities. These businesses can access up to 27% in tax savings or, if loss-making, a 14.5% cash credit for surrendered losses. This tiered approach ensures that high-innovation startups and small firms can still receive meaningful support.
Stricter rules on subcontracting and overseas work
One area that has tightened significantly is the treatment of subcontracted R&D and overseas activities. Previously, companies could claim for R&D performed by third parties abroad, including outsourced developers and labs. From April 2024, however, relief is generally limited to UK-based work, unless you can demonstrate that the activity could not reasonably be undertaken in the UK. For instance, if your project requires environmental conditions not available domestically, you may still qualify—but you’ll need strong evidence.
Similarly, Externally Provided Workers (EPWs) such as contractors or freelancers now must be paid through UK PAYE to qualify for relief. This change impacts many tech startups that rely on flexible, global workforces and makes it vital to review your labour and contracting arrangements.
New digital claim requirements
The new system introduces a mandatory digital submission process via HMRC’s online portal. All claims must now include a narrative breakdown of the R&D work, a summary of qualifying costs by category, and the endorsement of a senior officer from within the business. You must also disclose the identity of any R&D tax adviser who assisted with the claim.
In addition, first-time claimants (or those who haven’t claimed in the last three years) must submit a notification of intent to claim within six months of the end of the accounting period. Missing this deadline will mean losing the opportunity to claim altogether.
Increased HMRC scrutiny and potential advance assurance
In response to a surge in fraudulent and ineligible claims—amounting to over £4 billion in recent years—HMRC has expanded its R&D enforcement team significantly. Many companies, even those with legitimate R&D activity, are experiencing more scrutiny, delays, and in some cases, challenges to their claims. It is now more important than ever to ensure your records, documentation, and project descriptions are robust and clearly linked to the criteria defined by HMRC.
To improve compliance and reduce uncertainty, HMRC previously floated the idea of making advance assurance mandatory for high-risk or first-time claimants, though there has been little movement on this proposal. What is clear is that advance assurance remains an available option: businesses can ask HMRC to review and pre-approve their eligibility before submitting a claim, which can offer peace of mind and reduce the risk of later disputes.
What small business owners should do now
If your company invests in innovation, it’s critical to assess how these reforms affect you. Start by reviewing whether your accounting period falls under the new rules and whether you meet the R&D-intensive threshold. Revisit any international subcontracting arrangements and ensure all R&D activities are well-documented and aligned with the updated guidance. Consider working with an experienced advisor who understands the new framework—but be cautious of overly aggressive promoters, as HMRC is targeting questionable claims more aggressively than ever.
With proper planning and documentation, small businesses can continue to benefit from generous R&D support under the new regime—while staying on the right side of compliance.
Don’t wait until deadlines catch you out
Review your R&D activities, tighten your documentation, and seek expert guidance to make sure you’re maximising relief while staying fully compliant. Speak to one of our Milton Keynes tax experts today and put your business in the strongest position to innovate with confidence under the new rules.
Call us on +44 (0)1908 232020 or get in touch with our expert below.
