September 1, 2023 A guide to the 2023 changes to R&D Tax Credits
From April 2023, the Government introduced several changes to the R&D Tax Credits. Our experts take a look at the changes and the motives behind them.
The Government’s Rationale
The primary motives for introducing the new changes can be summarised in three areas:
- Tackling abuse – There has been an ongoing need for HMRC to tackle fraudulent claims and improve compliance. As such, the new process has stricter requirements.
- More help for Big Businesses – The original rationale was that SMEs required more support than larger corporations because they are often taking bigger risks. However, in practice, this didn’t work. The view now is that larger businesses are much more able to successfully bring about innovative changes and technologies due to their experience and resources. This has led to a rebalance in rates in the interest of reducing wastage.
- A domestic focus – The previous scheme rewarded innovation irrespective of geography, which often meant that the UK economy was only receiving limited benefit. To combat this, the 2023 R&D tax credit changes have a greater focus on qualifying R&D activity taking place in the UK.
An outline of R&D tax credit changes
This is a headline summary of the main changes and the relevant dates:
From 1 April 2023
- SME R&D enhancement rate is reduced from 130% to 86% – which will mean that you can deduct an extra 86% of the qualifying costs, as well as the normal 100% deduction, to make a total of 186%.
- SME tax credit rate was reduced from 145% to 10%.
- For larger companies, the Research and Development Expenditure Credit (RDEC) rate increased from 13% to 20%
- Eligible expenditure extended to include data licence and cloud computing costs, including storage.
- Mathematical advances are now treated as science for the purpose of R&D and therefore are allowable expenditure.
- Advance notification requirement – those claiming R&D tax credits for the first time from 1 April 2023 onwards, or those who have not made a claim in the previous 3 accounting period, will need to notify HMRC within 6 months of their year-end if they intend to make an R&D claim.
- R&D-intensive SMEs, defined as companies who spend at least 40% of their total expenditure on qualifying R&D, will continue to claim a credit of 14.5%.
From 8 August 2023
From 8 August 2023, claims will not be valid unless an additional information form has been filed (prior to submitting the claim) online providing details of the company such as:
- Unique Taxpayer Reference (UTR),
- Pay As You Earn number (PAYE),
- VAT Registration number
- Standard Industrial Classification code (SIC),
- Qualifying expenditure details
- List of projects being claimed.
This form will also provide information such as details of any R&D agent used and contact details for the senior officer responsible for the claim will also need to be provided, along with a selection of case studies.
Upcoming Changes for April 2024 and beyond
From 1 April 2024, third-party costs will only be eligible if, for subcontractors, the work has been performed in the UK, and for Externally Provided Workers (EPWs), if the payments are subject to UK PAYE. Directly employed staff based overseas will not be impacted. As currently drafted, there will be some limited exceptions in circumstances where it would be wholly unreasonable to undertake the R&D in the UK due to either geographical, environmental or social factors or where legal or regulatory requirements require activity to take place in specific territories. Costs and workforce availability are both explicitly ruled out as reasons for overseas expenditure to qualify.
Finally, another proposed change, with no associated timings is a potential move to a single scheme merging SME and RDEC incentives.
With the changes to the rules and the recent increase in corporation tax to up to 25%, now is a good time for companies to familiarise themselves with the reliefs that are available. R&D reliefs allows SMEs to deduct an extra 86% of their qualifying costs from their yearly profit, as well as the normal deduction, to make a total of 186% deduction. With the higher rate of corporation tax now live, identifying properly what projects count as R&D makes good financial sense for all businesses.
Applying the R&D tests can be complex. Clients who would like further information on the changes and would like to understand the likely chance of success of their claims should get in touch with their usual Elemental contact. To find out more about our R&D Tax Relief service, visit here.