The development of science, technology and new thinking in industry is encouraged through a programme of tax credits for qualifying research and development (R&D) activities for limited companies. The schemes are under continuous review and significant changes will be introduced from April 2023 and beyond.
Companies should carefully consider whether their activities qualify for valuable R&D tax credit relief and take full advantage where it is available.
The rules and qualifying criteria for the R&D tax credit relief system, across all industries and sectors, can be complex in terms of identifying what projects qualify for relief, eligible expenditure when data has not been captured at the time and the treatment of capitalised revenue expenditure. There are also two different schemes for small and medium-sized enterprises (SMEs), and large companies. It is important to note that this is a corporation tax relief, and as such, it is therefore only applicable to companies undertaking qualifying R&D activities.
R&D tax credit schemes
The main objectives of the R&D tax credit schemes review are to ensure that:
- The UK continues to be an attractive place for businesses to undertake cutting edge research;
- Taxpayer money is used effectively and is appropriately targeted; and
- The reliefs continue to be fit for purpose.
Innovation and increasing investment in R&D are seen as important drivers of economic growth by the UK government. The R&D tax credit rules have been updated from 1 April 2023 with a few welcome changes, including relief to companies innovating in pure mathematics and incurring costs relating to cloud computing and data.
Some less-welcome measures have been delayed to April 2024, including proposed rules for externally provided worker (EPW) and subcontractor costs which, from that date, will largely only qualify if the work has been performed in the UK (and additionally for EPWs, payments are also subject to UK PAYE). Whilst some exceptions to the UK based R&D activity requirements were proposed, these exemptions were seen as extremely narrow. The proposed changes also raise some queries and concerns in respect of international structures. Overseas costs will instead be revisited as part of a wider review into whether the UK should operate a single merged R&D scheme from April 2024.
Other significant changes
Other significant changes are aimed at targeting perceived abuse of the R&D tax credit regime and improving compliance. To achieve this, HM Revenue & Customs (HMRC) is introducing a requirement that:
- Claims must be made digitally with additional information provided to HMRC on a new digital form. Project and expenditure detail will need to be provided in a prescribed format, with a sufficient number of projects and percentage of expenditure described for the claim to be valid. The ‘additional information’ digital form will be available and mandatory from 1 August 2023;
- New entrants and companies who have not made a claim for three years with accounting periods commencing on or after 1 April 2023, will have to notify HMRC, within six months of the end of the period to which the claim relates, that they are intending to make a claim; and
- Each claim will need to be endorsed by a named senior officer of the business and will be required to name any third-party agents engaged in advising on the claim.
In response to reports of widespread abuse and fraud in the SME R&D relief scheme, and concerns that the SME scheme is not as GDP generative as the Research and Development Expenditure Credit (RDEC) scheme, changes to the rates of relief for qualifying R&D spend were announced in the 2022 Autumn Statement.
For expenditure incurred on or after 1 April 2023, the RDEC rate, for large companies, will increase from 13% to 20%. However, the additional deduction for SMEs will decrease from 130% to 86%, and the SME credit rate will generally decrease from 14.5% to 10%, unless the SME is deemed a R&D intensive company. This is a newly proposed measure of the Spring Budget to ensure greater R&D tax relief is given to those firms whose R&D expenditure is 40% or greater of their total expenditure (including connected companies), and will allow loss-making SMEs to continue to surrender losses at a rate of 14.5% for expenditure incurred on or after 1 April 2023.
It should be noted that no claims for this greater level of relief can be made until 1 August 2023 and so consideration should be given as to whether the submission of a claim is delayed, or duplicated (submitted pre-August to access relief at 10%, and resubmitting from 1 August to access the higher 14.5% rate).
Other significant changes are in the pipeline, particularly for the SME scheme further to the government publishing a tax consultation document in January 2023 to seek views on the design of a single, simplified R&D tax credit scheme, modelled on the RDEC scheme already in place. Read HMRC’s consultation and our response.
If you would like to understand more about the changing landscape of the R&D tax credit regime and how this may affect your company’s R&D claim, or if you believe that your company is engaging in qualifying R&D activity and think you have grounds for a valid relief claim, speak to your usual Saffery contact, or get in touch with Justine Stalker or Rachel Chappell.