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 currently under review and significant changes are expected 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 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.
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 will be 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. Conversely, there is concern around new rules being introduced for externally provided worker (EPW) and subcontractor costs which will largely only qualify if the work has been performed in the UK (and additionally for EPW’s, payments are also subject to UK PAYE).
Whilst there are some exceptions to the UK based R&D activity requirements, these exemptions are seen as extremely narrow. The proposed changes also raise some queries and concerns in respect of international structures. This includes how they will ensure appropriate R&D relief is provided to a UK company with an overseas branch undertaking R&D, or in the scenario when an overseas group company seconds a member of staff to a fellow UK group company who undertakes R&D in the UK, but costs are paid for by the overseas entity and recharged to the UK. Clarification on the above from the government would be welcome.
Other significant proposed 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 and that new entrants, and companies who have not made a claim for three years, will have to inform HMRC within six months of the end of the period to which the claim relates, that they are intending to make a claim. 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 decrease from 14.5% to 10%.
You would be excused if you thought that there would be no further updates to share in respect of the changing R&D tax credit landscape. However, some significant changes seem to be 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.
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 Champness contact, or get in touch with Justine Stalker.
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