December 14, 2022 Changes to RDEC Scheme Explained
In his autumn statement of 17th November 2022, the chancellor announced changes regarding research and development tax incentive rates for SMEs and claimants under the RDEC scheme.
For expenditure incurred on or after 1 April 2023, the additional corporation tax deduction for SMEs claiming R&D relief will reduce from 130% to 86% and the payable tax credit rate will reduce from 14.5% to 10%, while the large company R&D credit rate (RDEC) will increase from a current rate of 13% to 20%.
What do these numbers mean in practice?
SME R&D Claimants
The financial impact for SMEs in a corporation tax loss position for a particular accounting period is that the cash tax benefit currently available of up to 33.35% (230% × 14.5%) is to be reduced to 18.6% (186% × 10%), which is a significant reduction. If instead, an R&D claimant company chooses to carry forward tax losses until a taxable profit arises to offset against the claim, the R&D relief would generate a cash tax benefit of 21.5%, i.e. 86% × 25% (increased corporation tax rate to 25% from the existing 19% rate), instead of the current 43.7% (230% x 19%).
Large company claimants
The large company R&D credit rate (RDEC) is due to increase from a current rate of 13% to 20%. The cash benefit for claimant companies is to increase from a current rate of 10.53% (13% × 81%, due to the current 19% corporation tax rate) to 15% (i.e. 20% × 75%, due to the 25% corporation tax rate to apply). Another factor to consider is the profit before tax benefit, which can be recognised in the financial statements of claimant companies, increasing from 13% to 20%. This could represent a significant boost to RDEC claimants, particularly where qualifying R&D expenditure is sizeable.
Previously announced new measures
In addition to the changes outlined above, these previously announced measures are also due to come into force from 1st April 2023:
- All claims for tax credits will have to be submitted electronically through an HMRC portal and signed by a named senior officer in the company;
- New claimants and companies that haven’t claimed R&D tax reliefs in the last 3 years will be required to pre-notify HMRC of their intention to claim within 6 months of the end of the claim period;
- Subcontracted R&D work and the cost of externally provided workers will be limited to work undertaken in the UK. Expenditure on overseas subcontractors and agency workers will only qualify if it is absolutely necessary for work to be done overseas for non-commercial reasons (i.e. geographical limitations and legal requirements).
- The claims will require a breakdown of costs across categories and the inclusion of a brief summary of the R&D activities performed. (We already supply this information for our existing clients).
- Currently, costs related to cloud computing and data cannot be included in claims for R&D tax relief. However, from 1st April 2023 these costs will form part of the suite of qualifying costing categories.
Should you have questions on the impacts of the changes announced to your business’s R&D claim, please do get in touch with your usual contact or contact our Director of Tax and Accounting, Dhruv Patel.