We have seen a raft of changes to the Research and Development (R&D) tax relief and tax credit schemes – here is a summary of what has changed and when the change will impact your claims.
Claim rate changes from 1st April 2023
The Small & Medium Enterprise (SME) tax relief scheme has seen a reduction in claim rates while the Research & Development Expenditure Credit (RDEC) scheme, for large companies, has seen an increase in claim rates. The result is that SME claim rates are no longer significantly more generous than those that apply to large companies. The government has consulted on bringing the two schemes together, but it is likely to be some time before there is any news on how this may work.
SME R&D claim rate changes
The SME R&D enhancement rate, which is used to calculate the additional deduction for tax purposes, reduced from 130% for qualifying R&D expenditure up to 31st March 2023 to 86% for R&D expenditure thereafter. This means that companies offsetting profits will see the value of the extra R&D deduction reduce from just under 25p to just over 16p per pound spent on R&D, assuming a 19% corporation tax rate, rising to 21p where the 25% corporation tax rate applies.
The SME payable tax credit rate, which is the rate used to calculate the value of the cash payment available against surrendering a trading loss, also reduced. It is 14.5% for R&D expenditure up to 31st March 2023 and 10% for expenditure thereafter (except for R&D intensive companies – see below). This means the value of the maximum payable tax credit has reduced from 33p to 19p per pound spent on R&D.
It has been announced that R&D intensive companies will retain the 14.5% payable tax credit rate, meaning the value of the maximum payable tax credit for these companies will be 27p per pound spent on R&D. R&D intensive companies are defined as loss making companies where their qualifying R&D expenditure is more than 40% of their total expenditure in the relevant claim period.
RDEC (Research & Development Expenditure Credit) rate change
The RDEC claim rate has increased from 13% to 20%. This is applicable to large companies with over 500 employees and some SMEs that receive a subsidy for their R&D expenditures, such as grant funding. Claims are worked out differently under the RDEC scheme as the tax credit is an above the line receipt that is taxable. This means the post-tax value of an RDEC claim rises from around 10p per pound spent to around 15p per pound spent.
Other changes
New categories of qualifying expenditure
For accounting periods starting 1st April 2023 or later expenditure on data and all cloud costs incurred directly for R&D will be allowable as qualifying expenditure.
Pure mathematics as a qualifying activity
The definition of R&D for tax reliefs will be expanded to include all mathematics – clarifying in particular that ‘pure maths’ can qualify.
Use of foreign based subcontractors and staff suppliers
It was expected that R&D expenditure associated with using foreign based sub-contractors or foreign based staff would no longer be allowed for accounting periods starting on or after 1st April 2023. But this change has now been postponed to come into effect for accounting periods starting on or after 1st April 2024.
Digital submissions using compulsory additional information forms
It has been possible to submit an R&D claim by email or post and while HMRC set out what information needed to be provided, it was not compulsory to provide any supporting information. This will no longer be the case. As part of ‘tackling abuse and improving compliance’ HMRC has said that all claims made from 1 August 2023 must be made digitally using compulsory additional information forms.
The additional information required includes:
- A cost breakdown across qualifying categories of expenditure.
- A description of the R&D.
- The name of an endorsing senior officer from the claimant company.
- The details of any agent who has advised the company on compiling the claim.
Advance notification of making a claim (for new and infrequent claimants)
Companies will need to inform HMRC, in advance, that they plan to make an R&D claim. The notification will be via a digital service and will need to be done within 6 months of the end of the period of account to which the claim relates. But claim notification will only be required where a company has not made an R&D claim during the period of three years ending with the day before the first day of the claim notification period.
Read full HMRC Policy paper: Research and Development Tax relief reform changes https://www.gov.uk/government/publications/reform-of-research-and-development-tax-reliefs/research-and-development-tax-relief-reform-changes
Author: Linda Eziquiel. Director RandDTax.