In this blog, our tax relief experts outline the key R&D tax relief changes effective from 1 April 2023 and beyond.
We understand that the myriad of reforms to the scheme announced by HMRC can be unsettling for businesses, leaving you feeling under pressure to ensure your claims meet the new requirements.
Since HMRC began its crackdown on fraud and error within R&D tax credits, by improving the robustness of the scheme, there have been several updates and consultations to comprehend, which have led to confusion amongst businesses, accountants, and tax relief advisers.
It’s important to know that all these new regulations and requirements do not make R&D tax relief less worthwhile pursuing. It is still a generous relief, especially for larger companies, and the benefit is often used to invest in more R&D.
These changes are going to be hard, but it is ultimately going to be for the better if it cuts down on fraudulent claims. If you have doubts, work with a specialist.
You can also download our handy guide (see below).
Changes Relating to Expenditure Incurred on or After 1 April 2023
R&D Rate Changes
In the Autumn Statement, the Chancellor Jeremy Hunt announced increased generosity to the Research and Development Expenditure Credit (RDEC), whereby for expenditure on or after 1 April 2023, the RDEC rate is set to increase from 13% to 20%.
This is an after-tax increase from 10.53% to 15%.
For small and medium-sized UK companies utilising the SME scheme, with expenditure on or after 1 April 2023, the uplift rate on tax relief will fall from 130% to 86%, and the tax credit rate will drop from 14.5% to 10% for loss-making companies unless they meet the R&D-intensive threshold.
R&D-Intensive SMEs – What Are They and What Is the Threshold?
Following the cut to the SME rates previously announced in Autumn 2022, Hunt announced in the Spring Budget 2023 that there will be targeted support to loss-making R&D-intensive SMEs.
A company is considered R&D-intensive where its qualifying R&D expenditure is worth 40% or more of its total expenditure (the R&D intensity calculation has to aggregate connected companies).
Eligible loss-making companies will be able to claim £27 from HMRC for every £100 of R&D investment, instead of £18.60 for non-R&D-intensive loss-makers.
If a company meets the R&D intensity threshold, the additional relief uplift is still 86% (reduced from 130% as previously announced), but the tax credit rate for qualifying companies is 14.5% (not the reduced 10% previously announced, that applies to all other SMEs).
When Do the Changes Come in?
All the changes are for expenditure incurred on or after 1 April 2023, so companies with accounting periods that straddle this date will see a mixed claim of old and new rates.
An updated claim form will be made available in August 2023 for R&D-intensive companies to claim the credit at the higher rate. Hunt called this a £1.8 billion package of support helping 20,000 cutting-edge companies turning Britain “into a science superpower.”
What Is the Impact to a Business?
For highly profitable companies, the increase in corporation tax rate (to 25% for some companies, depending on profit and number of associated companies) and reduction in R&D benefits, partially offset each other. Therefore, companies whose R&D reduces profits chargeable to the new 25% corporation tax (or marginal rate), will see minimal impact.
If the R&D reduces profits charged at 19%, a business will unfortunately see a reduction in the rates of relief for its future R&D tax relief claims.
Of course, it will be some time before we start making claims that are impacted by the change, the earliest possible being any claims for a period ending 30 April 2023.
In the Spring Budget 2023, changes to pensions were announced (increase in annual contribution and removal of Lifetime Allowance), which have a positive effect on the amount of relief claimed in an R&D claim.
Employer pension contributions for staff involved in R&D projects qualify for the enhanced relief (by proportion to their R&D time). This means that any increase in employer pension contribution due to the Budget changes for employees engaged in the R&D projects will positively contribute to the amount of relief received.
Changes Relating to Accounting Periods Beginning on or After 1 April 2023
Companies Need to Notify HMRC in Advance
For accounting periods starting on or after 1 April 2023, every company that has never submitted an R&D tax relief claim before must inform HMRC that they are considering a submission within six months from the end of the accounting period for which the claim relates.
What Companies Must Give Advance Notification?
Any company that has not made a claim in the last three calendar years, or has never claimed, must notify in advance.
Any company that has made a claim in the last three calendar years does not need to notify in advance.
If the company notifies HMRC but does not make a claim, they are not penalised in any way but they will need to re-notify when they are ready.
The time period to actually make the claim remains at two years from the end of the accounting period.
HMRC is currently drafting its guidance as to how this form will work. One obvious risk under the new rules is that companies that do not get timely advice on claiming R&D tax relief could miss the deadline and lose out.
Changes Relating to Claims Submitted from 1 August 2023
Claims Need to Be More Comprehensive
All claims will need to be accompanied by a HMRC form outlining R&D activities and how they mirror HMRC legislation. This narrative will need to include information to support an R&D project’s scientific or technological advancement, with specific detail on the scientific and technological uncertainties encountered and attempted to overcome, the baseline in science or technology and the steps undertaken to overcome the uncertainties, along with a limited breakdown of qualifying costs by project.
The form will also need to be submitted digitally and at the same time as the return in which the claim is made for it to be considered eligible. Advisers will have to put their name to the form, and all claims must be signed off by a senior officer at the claimant company. The ‘additional information’ form only requests limited details so Ryan will continue to provide more detail in a full report, in order to robustly present a claim.
Changes to What Is Eligible
Many of the measures coming into effect are linked to cracking down on abuse of the scheme, though there are some other changes around what is eligible for relief.
1. Data and Cloud Computing Costs
The legislation is being updated to allow for claims on data sets, and cloud computing costs incurred on or after 1 April 2023.
Data claims can be made where a company buys data, purely for R&D, which has no resale value or lasting value to the company. Companies will also be able to claim on cloud computing services and cloud storage costs specifically incurred for R&D.
Data and computing costs are only eligible when they relate to direct R&D support activities, and so do not apply to finance or HR functions, for example.
2. Exclusion of R&D Costs for Activities Taking Place Overseas
In an effort to refocus R&D tax relief towards innovation in the UK and encourage companies to undertake innovation and R&D here, for accounting periods from 1 April 2024, subcontractor activities taking place overseas can no longer form part of an R&D claim. This has been delayed a year from 1 April 2023, following an update from HMRC dated 15 March 2023.
For the same periods, expenditure on payments for externally provided workers (EPWs) must be subject to (UK) PAYE and National Insurance contributions, unless it is qualifying overseas expenditure as above.
There are some exceptions to this future change, however. These occur if material factors — such as geography, environment, population or other conditions — required for the project are not present in the UK. For instance, in the case of deep ocean research. Another exception is when regulatory or legal requirements mean activities must take place outside the UK, such as with clinical trials.
3. “Pure Maths” Can Qualify
The definition of R&D for tax reliefs will be expanded to include all mathematics – clarifying in particular that “pure maths” can qualify. This is for accounting periods starting on or after 1 April 2023.
What Else Is the Government Considering?
A Single, Merged R&D Scheme
The Treasury is proposing a single scheme so companies of all sizes make claims in the same way, following the same rules.
It would be modelled on RDEC as much as possible, and it won’t take long to implement — it is intended to be in place for accounting periods beginning on or after 1 April 2024.
The government claims this move will benefit SMEs. It says this will give them clearer information about how much relief they will receive, which will help them budget for their innovation work and attract investors. Currently, SMEs only know with any certainty what they will receive at the end of the accounting period.
It would also benefit those companies that make claims under both RDEC and the SME scheme by making it less complicated.
At the moment, two of the biggest points of difference between the schemes involve how relief is paid for any subcontracted work, and PAYE caps. The government intends that all companies will calculate these in the same way, but is open to views from stakeholders about how this will work.
As part of the consultation, the government is also reviewing which qualifying indirect activities (such as HR or maintenance) should be included in R&D claims. It says results from a previous consultation showed these should be restricted or redesigned, and the government is therefore considering reforming the rules.
It may also reintroduce a threshold expenditure level in order to qualify for R&D tax relief. This was set at £25,000 when the SME scheme was first introduced, then reduced to £10,000, and removed altogether in 2012.
What Does My Business Need to Do?
The R&D tax reforms will aim to tighten up regulation of claims and ensure the government scheme is being utilised correctly and lawfully. As an innovative business, your role is to plan ahead for the changes. Here are some useful tips:
How Can Ryan Help?
Overall, an increase in R&D investment is great news, which will certainly go a long way in placing innovation at the heart of the UK’s economic recovery.
However, due to the lower benefit achievable for SMEs, this makes it more critical for genuine innovators to use reputable advisers to optimise their tax relief claim, by ensuring they identify as much of the qualifying R&D costs as can be supported by the guidance and legislation. This way, businesses can be assured their R&D efforts are fully rewarded.
Ryan’s professional team of experts will continue to campaign for tighter and fairer regulations and to help shape the future of the R&D incentive.