Research & Development (R&D) tax relief is changing significantly from April 1st 2023. Seonad MacLeod, Corporate Tax Manager at Kreston Reeves explains a little more
There are currently two schemes under which companies can claim R&D relief – the first is the SME scheme, used by small and medium sized enterprises (SMEs), and the second is the RDEC scheme mostly used by larger companies.
Changes are being made to both schemes, making the RDEC scheme more generous, and the SME scheme less so. The government’s stated policy aim is to eventually align these two schemes to simplify matters – though whether this will ever actually happen is anyone’s guess.
There are also significant changes which will impact on all claims for accounting periods beginning on or after April 1st 2023.
Changes to the SME scheme
Historically, the SME scheme has been almost lavish by international standards. Chancellor Jeremy Hunt has stated that he is concerned it is not working as it should be to encourage R&D – although perhaps he just concerned that it is too expensive. Either way, changes to the R&D regime announced in the Autumn Statement last year are expected to save the Exchequer £215m in 2023/24, rising to £1.34bn in 2027/28.
How will they save this money? For expenditure until April 1st 2023, a loss-making company can claim a tax credit worth up to 33.35p per £1 spent on qualifying R&D – but from April 1st 2023, this tax credit will reduce to 18.6p per £1 spent on qualifying R&D – a reduction of approximately 44%. Doom and gloom aside, although reduced, the tax credit is still very much worth having if you can get it.
The reduction will be achieved by reducing the additional deduction rate (the element that reduces a company’s taxable profit or increases its loss) from 130% of certain expenditure to 86% of that expenditure, as well as reducing the credit rate for surrenderable losses (the losses a company can surrender for cash from HMRC) from 14.5% to 10%. The mechanics of this mean that loss making companies – those who could really do with the cashflow benefit – will take the biggest hit. Whilst a loss-making company will experience a reduction to their tax credit of 44%, the reduction in the benefit of SME R&D relief for a profitable company will be a less significant 13%.
Changes to the RDEC scheme
The R&D Expenditure Credit (“RDEC”) scheme is used by companies over a certain size, in addition to SMEs undertaking grant funded R&D, or R&D subcontracted to them. There is better news for these companies, as the RDEC will be increased from 13% to 20% of qualifying R&D for expenditure from April 1st 2023.
The RDEC itself is a taxable credit, so the real increase isn’t quite as substantial as it sounds – the effective increase in the credit is from 10.5p per £1 of qualifying R&D spend to 15p per £1 of qualifying R&D spend. The RDEC scheme remains less generous than the SME scheme, but the gap has narrowed considerably.
CHANGES TO ALL CLAIMS R&D RELIEF FOR OVERSEAS EXPENDITURE
The other big change is a significant restriction on R&D relief for some overseas expenditure. This has been mooted for some time. The UK is currently more generous than international norms, offering R&D relief for expenditure regardless
of where work takes place. The government, awkwardly if somewhat understandably, wants R&D activity to take place in the UK, not overseas, and is changing the R&D tax regime to encourage this.
For accounting periods beginning on or after April 1st 2023, relief will only be available, with limited exemptions, for subcontracted R&D and contributions to independent research where these activities take place in the UK, and for payments to externally provided workers where these workers are paid through a UK payroll.
A bit of good news – relief for data and cloud computing costs; after sustained pressure, R&D relief will be introduced for data and cloud computing costs, for accounting periods beginning on or after April 1st 2023.
Some administrative changes
A whole raft of administrative changes have been announced. The most significant of these is the requirement to notify HMRC that an R&D claim will be made. The notification deadline will be six months after the end of a company’s accounting period – significantly in advance of normal R&D claim time limits (where a company generally has two years to make
This notification requirement will apply to companies making their first R&D claim where their accounting period begins on or after April 1st 2023, and companies that have not made an R&D claim in the preceding three years. Where a company is required to notify, but has not, R&D relief will be lost.
HMRC will also have increased powers to specify the form of and content of R&D claims.
The key message
Innovative companies need to take the time to understand the changes that are coming. There are some things that can be done, like bringing forward or delaying expenditure, or changing a company year end, but in the long term, the whole landscape of R&D relief is changing – and there are important strategic decisions to be made surrounding each R&D function.