Since the introduction of research and development (R&D) tax relief in 2000, it has been subject to numerous changes. The Autumn Statement 2022 (legislated in Autumn Finance Bill 2022) brought in a raft of changes including:
Rates of relief changes
For expenditure incurred on or after 1 April 2023, Research and Development (R&D) tax reliefs will be changed as follows:
- The small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%.
- the SME credit rate will decrease from 14.5% to 10% for loss-making entities.
- R&D expenditure credit (RDEC) rises from 13% to 20%. The after-tax impact will increase from 10.53% (based on 19% corporation tax) to 16.2% (based on 19% corporation tax) or 15% (based on 25% corporation tax).
- The R&D Intensive SME payable credit is introduced from April 2023 at the rate of 14.5%. A company is considered R&D intensive where its qualifying R&D expenditure is worth 40% or more of its total expenditure. These eligible loss-making companies will be able to claim £27 from HMRC for every £100 of R&D investment, instead of £18.60 for non R&D intensive loss-makers.
This reform ensures that taxpayer support is as effective as possible, improves the competitiveness of the RDEC scheme, and is a step towards a simplified, single RDEC-like scheme for all.
More R&D qualifying cost eligible for tax relief
For accounting periods beginning on or after 1 April 2023, a wider range of cost categories will be available for inclusion:
- pure mathematics
- data and cloud computing costs including the cost to acquire data used directly in the R&D project with no future value or resale value to the claimant, and the cost of cloud computing services including the provision of access to and maintenance of remote data storage, operating systems, software platforms and hardware facilities. The cost must directly relate to the R&D activities – in other words, qualifying indirect activities that are normally eligible for relief will not be so under this category of cost.
No R&D relief for activities undertaken outside the UK
From 1 April 2024, it will no longer be possible to claim for subcontractor and externally provided worker costs where those activities take place outside the UK. Companies will not be able to claim that overseas costs fall within the exemptions where the main reason that the work is being carried out overseas is due to cost constraints or that the business does not have suitable workers in the UK.
There are two exemptions:
- geographical, environmental or social conditions, as a result of which the R&D activities may not be undertaken in the UK
- legal or regulatory requirements, as a result of which the R&D activities may not be undertaken in the UK.
The legislation makes it clear that cost and availability of resource are not exemptions to the exclusion. Therefore, companies using overseas resources face a choice:
- use a UK resource (if available) at a higher cost
- accept that the R&D tax relief claim will be reduced
- if viable, move the R&D to a jurisdiction with no such restrictions.
If the cost has been processed through a UK payroll, it can still be claimed.
The above announced changes will take place for accounting periods commencing on or after 1 April 2023. Therefore, unless a company prepares accounts for a period of less than 12 months, or a company has a long period of account such that the period falling after the first 12 months of the period of account starts after 1 April 2023, then most of the impact will be felt for periods ending on 31 March 2024 and beyond.
Anti-abuse steps
In addition to the above changes, there are proposals to avoid the abuse of R&D relief which include:
- All claims must include project and cost details. Many advisers prepare such reports, but they have never been mandatory until now and it is surprising that this step wasn’t taken a long time ago. All claims must now be supported with detail. This may lead some advisers who ‘dabble’ in the relief to outsource to an R&D tax relief specialist.
- The agent who advised on the claim must be named.
- There must be an endorsement from a senior officer of the company.
- The claim must be made digitally.
- The R&D Intensive SME Relief will be claimable by the company submitting or amending its CT return. Companies will indicate whether or not they are claiming as R&D intensive companies using a new digital ‘Additional information’ form, which is being introduced for claims made on or after 1 August 2023.
- Companies that have never claimed R&D tax relief before must notify HMRC in advance of their intention to claim within six months of the end of the accounting period to which the claim will relate. Companies that have made claims in any of the prior three periods do not have to notify. The filing date will remain unaltered, being 24 months after the end of the accounting period (for an amendment to the Company Tax Return CT600).
- In future, if a company ceases to be regarded as ‘going concern’ solely because of the transfer of a trade out of the business, but it is otherwise financially viable, the company will still be able to claim R&D relief. For accounting periods beginning on or after 1 April 2023, where a company’s accounts would have been made up on a going concern basis, save for the transfer of activities to another group company, the accounts are treated as if they were made up on a going concern basis.
As claiming the R&D tax relief is a specialist area, ACCA'S Guide to R&D expenditure credits includes useful guidance for the understanding of this valuable relief. The process of making an R&D tax claim can be complicated, but there are some simple things you can do to improve the accuracy and the effectiveness of your R&D claims.
