The R&D Tax Credits scheme has been an integral government initiative for driving innovation throughout all UK businesses, with even more generous support for SMEs, for over two decades. The scheme has been beneficial to both profitable and loss-making businesses, and in some cases even a lifeline to many early-stage startups who have spent time and money in the research and development phase of their product.
As of the 1st of April 2023, the new R&D Tax Credit legislation will officially come into effect after having been recently updated in the 2023 Spring Budget Announcement, originally disclosed in the 2022 Autumn Budget. HMRC cites their reasoning for these changes as measures to stop fraudulent activity and abuse of the existing scheme.
This follows HMRC pausing the payment of R&D claims in 2022 as they investigated significant and repeated abuse of the scheme. The changes being implemented appear to be an attempt to tackle fraud within the scheme without disadvantaging compliant businesses.
Additionally, the changes to qualifying expenditure look to re-focus R&D tax relief on activities performed in the UK and incentivise companies to move their innovation efforts to the UK.
But don’t let any of this scare you!
We’re here to tell you exactly what those changes are and how they will impact your future R&D claims, particularly after the updates announced with the Spring Budget on March 15th 2023.
As R&D Tax Credit specialists, our team is on hand to support your business and ensure your R&D claim is both compliant and maximised within the constraints of the new legislation.
Let’s break down exactly what the new legislation means.
What’s changing for the rates?
There are a couple different areas in which the scheme is changing, but perhaps most dramatically is the difference in rate changes being introduced as of April 1st 2023.
For SMEs, the enhanced deduction rate will be reduced from 130% to 86%, so the tax benefit given by the scheme for sufficiently loss-making companies will be reduced to 18.6p for every £1 instead of 33p per £1.
However, in today’s Spring 2023 Budget announcement, Jeremy Hunt introduced a higher rate of relief for loss-making SMEs that have spent at least 40% of their total expenditure on R&D, which allows them to claim up to 27% in tax relief. Although this is still a 5% decrease from the original 33% rate, this update is good news for loss-making SMEs to claim a higher payable credit rate.
For profitable companies there will be slight reduction, going from 24.7p per pound down to 21.5p per pound.
The changes to the RDEC component of the scheme is overwhelmingly positive. Despite changes to the corporation tax rising from 19% to 25%, the tax credit rate will increase from 13% to 20%, resulting in the chance to earn back up to 15p per £1 after Corporation Tax. For companies that receive Grant Funding, this is great news as any grant funded or subsidised expenditure is mandatorily included within an RDEC claim.
With the rate changes affecting SMEs and the RDEC scheme, HMRC appear to be providing the framework to bring both schemes together into a one size fits all scenario in the future.
Changes to qualifying expenditure: Subcontractors
As announced during the 2022 Autumn Budget, it was planned that as of the 1st of April 2023, any R&D subcontracting will have to take place within the UK in order to qualify for tax relief through the scheme. However, as of the Spring 2023 Budget announcement today, this new rule will be pushed back by 1-year and come into effect as of 1st of April 2024. This is great news for all innovative startups in the UK who currently are outsourcing any of their R&D outside of the UK.
However, it’s worth noting that there are some exceptions to this rule when it comes into effect in 2024.
Exceptions can be made in special circumstances where the research and development taking place requires certain conditions to be present (i.e. geographical, environmental, social, etc), and cannot be replicated in the UK. Examples of this include deep ocean research or clinical trials that are seeking licensing approvals.
This change in the scheme demonstrates HMRC’s desire to attract innovative workers to the UK, by encouraging more R&D activity to occur locally, rather than funding outsourced development.
Changes to qualifying expenditure: Cloud Costs and Pure Mathematics
As of the 1st of April 2023, you will be able to include costs for cloud computing technology, data licenses and advances in pure mathematics when submitting your R&D claim.
The expansion of qualifying expenditure to include these costs are productive changes, indicating the UK Government’s positive outlook on SaaS-based companies that utilise these technologies in their R&D.
Changes to the process of making R&D claims
The process in which you submit your claims to HMRC will also be changing.
If this is your first claim, or you’ve not submitted a claim in the last three accounting periods then you will need to notify HMRC digitally beforehand.
In addition, you’ll need to provide more details about the R&D agent, if you choose to use one to submit your claim. These extra steps are part of the government’s initiative to eradicate cases of fraud.
As part of your R&D claim you will need to;
List a break-down of your costs under their respective qualifying categories.
Write a short description that outlines your R&D.
Add a ‘Senior Officer’ of the company to endorse your claim before submission.
Include your agent’s details – if you had one help you put together your claim, such as an accountant or advisor.
Of course, if you engage with Claim Capital to complete and submit your R&D claim you won’t need to worry about what these changes mean for the R&D claim process as we’ll take care of all of this for you.
While some of these changes to the scheme may seem disruptive to SMEs involved in truly innovative R&D, it is still more important than ever to maximise your claim. With the changes from the Spring 2023 Budget, there are still plenty of opportunities for you to claim R&D tax relief in 2023 so you can continue to invest in your business.
Speak with one of the team at Claim Capital and we’ll be happy to help you navigate these changes and ensure you submit the best claim possible for your business.
If you'd like to find out more about the changes our director, Max Raynor, will be going into more detail in an upcoming webinar on the 21st of March. Visit our webinar registration page to save your spot!