Effectively claiming for research and development (R&D) tax relief can be unsettling for business owners across the nation. Doubly so when the legislative guidance governing this lucrative scheme is constantly being updated by HMRC to combat the ever-rising fraud within this space of tax relief. Countless continue to place their full faith in their R&D tax specialist to maximise this generous benefit.
Companies that have carried out qualifying R&D activities seeking tax relief under either of the two schemes, the Research and Development Expenditure Credit (RDEC) or the small or medium enterprises (SME), will be subjected to the new measures announced in the Spring Budget 2023 speech, announced by chancellor Jeremy Hunt. However, depending on the matter subject for change, this may come into effect either for accounting periods beginning on 1 April 2023, straddling this date, or for accounting periods beginning on or after 1 April 2024.
With the Finance Bill 2022-23, now formally known as Spring Finance Bill 2023, making its way through the various stages of the passage prior to receiving the Royal Assent, Khaled Fatheldin, Senior Consultant, R&D Tax Analysis at Ryan, details what’s expected to come.
Corporation Tax (CT) Rate Increase from 1 April 2023
For profits generated from 1 April 2023, companies will be subjected to varying CT rates, depending on the size of their profits.
The main rate of 25% is set to apply against companies with profits in excess of £250,000. The small profits rate of 19% is available for companies with profits up to £50,000. Those in between these thresholds will be subject to a tapered rate.
These limits will be divisible across the number of associated companies within a group structure, and for accounting periods less than 12 months long, the limits will be time apportioned.
Additional Support for R&D-Intensive SMEs
Whilst the government fully intends to proceed with the reduced uplift of 86% for qualifying R&D expenditure incurred from 1 April 2023, SMEs that are defined as “R&D intensive” would still retain the 14.5% R&D tax credit relief rate, as opposed to the 10% rate for loss-making SMEs.
R&D-intensive SMEs are those where 40% or more of their companywide expenditure relates to qualifying R&D spend for the given period.
Increasing RDEC Rates
In line with an anticipated harmonisation of the available R&D schemes, the RDEC rates are set to increase as well, this time around. The increase from 13% to 20% for the headline RDEC rate is welcome for all those entitled to relief under this scheme.
However, as this benefit is an “above-the-line” incentive, companies are expected to pay corporation tax on this credit. Considering the newly introduced 25% CT rate, the benefit most companies can expect from this claim would be 15% after tax. This is still a substantial increase from the pre-April 2023 figure of 10.53%.
Summarising the New Rates
The benefit outcome for loss-making SMEs varies significantly, depending on how severe their loss-making position is for the respective claim period in question. The graph above shows the maximum that a loss-making SME may be entitled to.
What we can also conclude from the April 2023 onwards rates of relief is just how much closer the government is lining up the two relief schemes for a possible consideration of merging them into one in the future.
R&D Claim Pre-Notification
Effective from 1 April 2023, claimants, new to lodging an R&D claim, must notify HMRC within six months after the end of the accounting period to which the claim relates. The pre-notification requirement also applies to claimants who have not submitted an R&D claim within the prior three accounting periods, irrespective of older claims in the past.
Failing to submit a pre-notification would mean that the R&D claim would not be accepted by HMRC, for the period in question.
Additional Information Form
From 1 August 2023, all claimants will need to complete and submit an additional information form to HMRC in support of their R&D claim. Whilst it is possible to submit this form before 1 August 2023, this is not currently a requirement from R&D claimants.
It is important to note that the form must be submitted, when it is required, before submitting the returns with the R&D figures, elsewise, the claimant risks these being removed from the CT return by HMRC.
The form may be submitted by either an R&D agent, or a representative of the claimant company. The detail required on the form relates to both, an existing ongoing project, or one that is new. It also requires details of the qualifying R&D expenditure and information pertaining to the R&D projects undertaken. Claimants with numerous ongoing qualifying R&D projects are permitted in spotlighting a few sample projects, as opposed to all. However, these must cover a minimum of three projects which accounts for 50% or more of the qualifying R&D spend.
Tackling Abuse and Improving Compliance
Stricter requirements now mean companies undertaking qualifying R&D activities and wish to claim relief on those expenditures must now, when filing their claims, support these with a clear breakdown of the costs across the qualifying heads of expenditures. This is in addition to a detailed narrative, providing a comprehensive description of the R&D, highlighting the challenges and uncertainties undertaken by the claimant. A designated senior officer of the claimant will need to be identified and named with each claim. That is in addition to the full details of the R&D agent who has advised the company on compiling the claim.
Dataset Costs, Cloud Computing, and Mathematical Advances
Whilst software purchases have been an eligible cost for some time now, expenditure relating to dataset acquisitions or cloud computing had always been deemed non-qualifying, regardless of their necessity for R&D.
The reformation proposal is expected to ringfence these costs within the realms of eligibility. Equally important to note is that, where applicable, a fair and justifiable approach should be taken to only include the proportion of expenditure on these items where they have had a direct utility on the qualifying R&D activities.
The latest publication of the guidance from the Department for Science, Innovation & Technology now includes a broad description of pure mathematics. As defined under guideline 15B: ‘Mathematical techniques are frequently used in science. From April 2023 mathematical advances in themselves are treated as science for the purposes of these Guidelines, whether or not they are advances in representing the nature and behaviour of the physical and material universe.’
Subcontracted Activities and Externally Provided Workers (EPWs)
Previously, it was announced that restrictions would apply on overseas subcontractor and EPW expenditure, unless they met certain exemptions. Whilst this was originally set to come into effect for accounting periods starting on or after 1 April 2023, it has now been pushed back a year, allowing HMRC to further investigate how this would come into effect, particularly with the proposed measure to potentially merge the two R&D relief schemes, SME and RDEC, into one.
In conclusion, it is noteworthy to mention that the above is not an exhaustive list of the upcoming R&D tax reform, but rather a glimpse of the continuous updates and changes the R&D tax relief sector is subjected to, that professionals are expected to stay on top of, year-on-year.
Given the increased compliance measures imposed and the costly fines HMRC may enforce on errors made on R&D claims, deliberately or due to carelessness, it is now more important than ever to ensure peace of mind and consider working closely with a specialist R&D agent to assist with the compilation of a claim.
Navigating the stormy waters of R&D tax relief and understanding the options available specifically to you and your business’ bottom line is just one of the many moving parts when considering Ryan, for preparing a robust R&D claim; a service line we fondly and proudly specialise in.