In the Autumn Budget 2021, the government announced reforms to Research & Development (R&D) tax reliefs. This was followed by further announcements during the Autumn 2022 budget.
The R&D tax relief regime can offer extremely beneficial tax savings to certain businesses but the changes announced in some cases will result in significant impact for businesses, which could be beneficial or negative depending on the fact pattern.
In headlines, the reforms seek to:
For accounting period commencing 1 April 2023
- Broaden the definition of qualifying expenditure.
- Refocus the support towards innovation in the UK (rather than R&D undertaken abroad).
- Target abuse and improve compliance.
For expenditure incurred on or after 1 April 2023
- Update the amount of relief provided.
Here we take a headline look at those changes and how they may impact your company.
What is the R&D Tax Relief Regime?
R&D tax reliefs support companies that do work to create an 'advance in science or technology', typically overcoming uncertainty on whether or if that 'advance' can be achieved. It can be claimed by a range of companies and certainly isn't reserved for those in a typically 'scientific' industry.
If a project meets HMRC's definition of R&D for tax purposes your company can stand to benefit under one of two regimes:
Small & Medium Enterprises (SME)
The SME regime allows companies to:
- Deduct an extra 130% of their 'qualifying expenditure' from their taxable profits (in addition to the costs themselves) to make a total 230% deduction.
For expenditure incurred from 1 April 2023 this additional deduction reduces to 86% to make a total of 186% deduction.
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
For expenditure incurred from 1 April 2023 the tax credit reduces to 10%.
Headline benefits of the R&D schemes
Expenditure incurred on or before 31 March 2023
Expenditure incurred on or after 1 April 2023
43.7p per £1 (calculated as 230% of qualifying expenditure attracting tax relief at 19%)
46.5p per £1 (calculated as 186% of qualifying expenditure attracting tax relief at 25%)
33.35p per £1 (calculated as 230% of qualifying expenditure at a credit rate of 14.5%)
18.6p per £1 (calculated as 186% of qualifying expenditure at a credit rate of 10%)
Large Company regime
Large companies can claim a Research and Development Expenditure Credit (RDEC) for undertaking qualifying R&D projects.
The RDEC can also be claimed by SMEs who have been subcontracted to do R&D work by a large company, or where a small company has benefitted from a grant towards their R&D expenditure which would not qualify under the SME regime.
The RDEC is a tax credit of 13% of your qualifying R&D expenditure.
For expenditure incurred on or after 1 April 2023 this credit increased to 20%.
Note: Companies that do not have a 31 March year end will need to apportion their qualifying R&D expenditure for periods that straddle 1 April 2023 to ensure that correct rates are applied.
What is changing?
With effect from all accounting periods commencing on/after 1 April 2023 HMRC will implement three key reforms to the R&D tax relief schemes in addition to the rate changes referenced above:
- An extension of qualifying expenditure to include data licensing and cloud computing costs.
To better reflect the current use of technology within R&D, HMRC have added these two new categories of expenditure that were previously excluded.
- Refocusing the relief towards innovation in the UK.
R&D qualifying expenditure will be refocussed on domestic expenditure by excluding expenditure from qualifying R&D of:
Target abuse and improve compliance
- Overseas subcontractor costs, and
- Overseas externally provided workers
HMRC have identified a recent emergence of some R&D advisers who may not be members of professional bodies or have the relevant expertise and are known to submit dubious claims.
To stem the tide and reduce the abuse HMRC will implement various process changes, including:
- A requirement for all claims to be made digitally
- A requirement to include specified information as part of all claims
- Claims to be endorsed by a named senior officer of the company
- A requirement to include details of any agent who advised on the claim
- A requirement to inform HMRC in advance of an intention to make a claim within 6 months of the end of an accounting period, applicable to:
- First time customers, or
- those who have not made a claim in the previous three calendar years
Clearly these changes will be significant and, with the expansion of the scope of qualifying expenditure, may open the door to new companies who have not previously considered making a claim for R&D tax relief.
It is also now clear that HMRC are actively seeking to clamp down on spurious claims, meaning it is increasingly important that companies tread a careful path when choosing a firm to assist with an R&D claim and understand the benefits, the risks and the process associated with preparing and submitting a claim.
HMRC are running an eight week consultation, up to 13th March 2023, looking at the design of a potential single R&D scheme based on the current R&D expenditure credit (RDEC) which is currently aimed at larger companies.
How can we help?
At Lopian Gross Barnett we assist many of our clients with R&D tax relief claims, working with them closely to identify what expenditure qualifies for relief through to submission and acceptance of a claim from HMRC.
It is not unusual for business owners and senior management to overlook certain categories of expenditure which they may not have previously thought qualifying, or overlooked whether a claim is possible at all.
If you would like to discuss how we may be able to assist you with an R&D tax relief claim please contact us to discuss further.