1 April 2023 heralds the start of significant reforms to the UK R&D tax relief schemes. In this article, we explore the key changes and how they affect you and your business.
1. Changes to the R&D tax relief rates
The R&D tax relief rates for R&D expenditure incurred after 1 April 2023 is changing. The changes are designed to ensure that the schemes provide better value for the UK taxpayer and to bring the tax benefits available under the R&D SME scheme and RDEC closer together in preparation for a unified R&D tax relief scheme.
The RDEC is increasing to 20% from 13% and the SME super-deduction is reducing to 86% from 130%. For profitable SME companies claiming under the R&D SME scheme, the change will result in a 3.2% reduction in net benefit for expenditure incurred after 1 April 2023. For profitable companies claiming under RDEC, the change will result in a 4.5% post tax benefit for expenditure incurred after 1 April 2023.
For claims in respect of R&D expenditure incurred after 1 April 2023, the repayable tax credit available for loss making SMEs claiming under the R&D SME scheme will reduce from 14.5% to 10%. The effect will be to reduce the benefit by 14.8% in comparison to what would have been claimable for the same amount of money spent on R&D before 1 April 2023.
To buffer the negative impact that these changes will have on R&D intensive companies, who are likely to be spending substantial amounts of money on R&D but loss-making in the first few years of trading, the Government has announced that the 14.5% repayable tax credit will remain provided that the R&D expenditure totals at least 40% of the company`s overall expenditure.
2. Requirement to notify HMRC in advance of the intention to claim R&D tax relief
For accounting periods beginning on or after 1 April 2023, all companies will be required to notify HMRC in advance of their intention to claim R&D relief, unless they have made a claim in any of the preceding three accounting periods before the current claim period. The notification must be made digitally and within a period of six months beginning with the last day of the accounting period which is the subject of a claim. If the notification is not made, the claim will be disallowed.
This change is designed to afford HMRC the opportunity to assess the merits of a R&D tax relief claim at an earlier point than currently and to step in and provide advice to a company if it considers that a R&D project does not satisfy the tax definition of R&D and a claim ought not to be made. In addition, it will reduce the number of historic claims submitted.
3. Requirement for R&D tax claims to be made digitally & to provide specific information about the claim to HMRC
From 1 August 2023, all claims for R&D tax relief must be submitted to HMRC digitally, through HMRC`s online portal, unless a company is exempt; for example, a company that is run by individuals who are practising members of a religious society or order whose beliefs are incompatible with the use of electronic communications.
To tackle concern about potential abuse of the reliefs, all claims must be accompanied by a compulsory additional form which must provide a description of the R&D projects and break the costs down across the qualifying categories.
A company will be required to notify HMRC of the identity of any agent that has assisted with compiling the claim and a named senior office of the company will be required to endorse the R&D claim prior to submission.
The changes are designed to help HMRC eliminate undesirable behaviour, whether deliberate or accidental. By notifying HMRC of the identity of agents helping companies to compile claims, HMRC will be able to identify behavioural patterns and take appropriate action.
4. Extension to the scope of qualifying R&D expenditure to reflect the use of software in R&D projects & advances in pure maths
To incentivise R&D using modern computational approaches, the Government is extending the scope of qualifying R&D expenditure to include the costs of data licences and cloud computing services. The Government is also including advances in pure maths as a category of qualifying R&D.
This new measure will begin for accounting periods beginning on or after 1 April 2023.
5. Measures to address anomalies and unforeseen consequences
To ensure that the reliefs operate as intended, HMRC has introduced a number of changes which include:
- Allowing companies to claim RDEC where a claim had previously been made, incorrectly, under the SME scheme and the time for amending the claim has expired.
- Clarifying that expenditure generally qualifies where a payment is made within two years of the end of the accounting period in which the expenditure was incurred.
- Supporting businesses growing and transitioning from the SME scheme to RDEC, by providing that where an SME within a group exceeds the size thresholds for an SME, all companies in the group will retain SME status for one year afterwards. Under the current legislation, while the company itself retains its status, other companies in the same group lose their SME status straight away
- Amending the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date as defined by paragraph 14 of Schedule 18 to Finance Act 1998. This will prevent companies which do not receive a notice to file, either because they fail to register or notify HMRC that they are dormant, from benefiting by having more time to make a claim
- Amending the rule preventing relief for a company which is not a “going concern” so that where a company ceases to be going concern solely because of the transfer of a trade, and is otherwise viable, it may still claim.
6. Restricting subcontracted expenditure to that undertaken in the U.K.
To ensure that all R&D incentivised by the reliefs benefits the U.K. economy, the Government is introducing a requirement that any subcontracted R&D takes place within the U.K. and any activity carried out by externally provided workers also takes place within the U.K.
If the R&D activity is conducted overseas, the cost will be disallowed as qualifying R&D expenditure unless the case falls within narrow, limited exemptions. The exceptions are:- if the R&D activity has to take place overseas because of regulatory or legal compliance requirements or the R&D cannot take place within the U.K. because of geographical, or environmental reasons that are not present in the U.K. If an exception applies, the R&D cost will be allowable as qualifying R&D expenditure.
This change was to take effect for accounting periods beginning on or after 1 April 2023 but has now been deferred until 2024.
What the changes mean for you
The above is a snapshot of some of the major changes that are coming into effect to help the Government to reform the effectiveness of the UK R&D tax relief schemes. More change is expected as the Government has recently consulted on the consolidation of the SME R&D scheme and RDEC; providing a unified scheme for R&D tax relief for companies of all sizes.
Keeping abreast of the changes and ensuring that all R&D tax relief claims submitted are compliant has never been more important. At Claritas we have a team of experts who can support you through the changes and ensure your claims are robust and prepared in a timely manner. Speak to our Head of Innovations Caroline Walton for more information on how we can help.
