R&D tax relief changes: what you need to know

TaxTalk - April 2023

read timeRead time: 4 mins

HMRC has long been uneasy about the perceived number of fraudulent R&D tax relief claims. We look at the revisions it has made, and what they mean for your company.

There have been significant changes to the R&D tax relief scheme following the Chancellor’s Autumn Statement. How effective they will be remains to be seen. The greatest impact of the new measures is likely to be felt by loss-making SMEs where additional funds from R&D tax credits can prove vital.

Profitable SMEs

Qualifying SME R&D expenditure has been eligible for an uplift of 130% for several years. But that uplift is only now available until 31 March 2023. From 1 April it will be reduced to 86%. If your venture is profitable the net benefit will reduce from 24.7% to 21.5%, with the latter net benefit assuming a Corporation Tax rate of 25%. But with some businesses continuing to pay Corporation Tax at 19% or a marginal rate of 26.5%, the post 1 April net benefit will depend on the specific circumstances.

Loss-making SMEs

SME companies in a loss-making position before 1 April 2023 will have been able to surrender their enhanced R&D expenditure, amounting to 230% of the original expense, for a 14.5% R&D tax credit. Post 1 April, the enhanced R&D expenditure, being 186% of the original expense, can be surrendered for a 10% R&D tax credit. So, in effect, the Government’s subsidy is being reduced from 33.4% to 18.6% from April.

Large company R&D tax relief changes

Large companies claiming R&D tax relief through the RDEC (R&D expenditure credit) scheme will see an increase in their net benefit from 1 April 2023. The RDEC will be increased to 20%, up from 13%. This will result in a net Corporation Tax reduction / subsidy of 15%, up from 10.5%.

Most RDEC claims are made by companies that are large for R&D purposes. But it’s worth noting there will also be SME claimants who have been subcontracted R&D work, and others who can only use the RDEC scheme due to certain grant funding that will also benefit from RDEC scheme changes.

HMRC defines a large company as having either more than 500 employees or an annual turnover over €100m and a balance sheet over €86m. The staff, turnover and balance sheets of any connected companies should be included in the total.

Qualifying R&D expenditure changes

As well as the headline rate relief, there have also been substantial changes to the scope of expenditure that may be included in an R&D tax relief claim, for large companies and SMEs, for accounting periods beginning on or after 1 April 2023. These include:

  • Data licences
  • Cloud computing
  • Pure mathematics.

But sub-contracted work, externally provided worker and (for large companies) contributions to independent R&D, will be limited to focus on UK activity only.

Remember that this new scope of expenditure applies for accounting periods on or after 1 April 2023, so the date from which rules will apply depends on the company’s accounting year end. It’s worth considering whether it’s best to defer costs or to amend the company’s accounting period to take advantage of the legislative changes.

Administrative R&D claim changes

Companies whose accounting periods begin on or after 1 April will also have to deal with administrative changes to R&D claims. For example, all R&D claims must be made digitally, and each one must be endorsed by a senior company officer with the details of any agent advising on the claim.

Proposed R&D tax relief changes

It would be reasonable to expect these substantial changes to the R&D tax relief scheme to lead to relative stability in the scheme for some time. But HMRC plans to go one step further. On 13 January it launched a consultation on a potential single R&D scheme for both large companies and SMEs, based on the current RDEC scheme. The single scheme may provide more targeted support for certain industries, such as green technology or life sciences.

If the R&D tax relief schemes are merged, the consultation suggests this could apply to accounting periods starting on or after 1 April 2024.  As a result of this review, the originally proposed restriction of qualifying R&D expenditure to UK-Centric activities has been delayed from April 2023 to April 2024.

The consultation closed on 13 March. As ever, PKF will of course keep you updated on the outcome.

Seek good advice

With so much upheaval in the R&D tax relief scheme, and expected additional scrutiny of claims, it’s more important than ever to have a diligent, accurate and knowledgeable R&D tax advisor who is familiar with all the recent legislative changes. They will help you navigate the claims process, identify all qualifying expenditure, and make a successful claim. This should provide valuable, additional working capital to help drive your business goals and ambitions even further.

For more information, please contact David Emery.