R&D tax relief is currently under significant scrutiny from HMRC with an increased number of compliance officers recruited to carry out additional compliance checks, also known as tax enquiries, into R&D claims.
In January 2023, HMRC undertook a targeted campaign by sending out over 2,000 “nudge” letters to raise taxpayers’ awareness of fraudulent claims and encourage voluntary disclosure of errors. These letters are not compliance checks into submitted claims, however are designed to encourage compliance and raise customer awareness of the qualifying conditions for R&D tax relief.
HMRC also opened a consultation into the possibility of introducing a single scheme for R&D tax relief. This closed in March 2023 and feedback is currently being reviewed.
Changes to tax relief
From 1 April 2023, there are changes to the rates of tax relief available under both the RDEC and SME schemes. The headline RDEC rate increases from 13% to 20%, albeit this is a taxable credit. In contrast, the SME additional tax deduction decreases from 130% to 86%, along with a decrease in the rate of SME tax credit from 14.5% to 10%.
Whilst some of the percentages might appear quite arbitrary, it is likely these were considered in line with the increase in the main rate of corporation tax from 19% to 25%, also effective from 1 April 2023.
The pre and post 1 April 2023 tax benefit of making an R&D claim under the SME and RDEC schemes is summarised below.
|SME Scheme||RDEC Scheme|
|Pre 1 April 2023||Post 1 April 2023||Pre 1 April 2023||Post 1 April 2023|
|Profitable company||24.7% Additional tax saving on qualifying expenditure (130% enhancement x 19% rate of corporation tax)||21.5% Additional tax saving on qualifying expenditure (86% enhancement x 25% rate of corporation tax)
|10.53% Additional tax saving on qualifying expenditure (13% rate of RDEC taxed at 19% rate of corporation tax)||15% Additional tax saving on qualifying expenditure (20% rate of RDEC taxed at 25% rate of corporation tax)|
|Loss making company||33.35% Tax credit on qualifying expenditure (230% enhanced expenditure x 14.5% rate of tax credit)||18.6% Tax credit on qualifying expenditure (186% enhanced expenditure x 10% rate of tax credit)*||10.53% Tax credit on qualifying expenditure (13% rate of RDEC taxed at 19% rate of corporation tax)||15% Tax credit on qualifying expenditure (20% rate of RDEC taxed at 25% rate of corporation tax)|
Companies that do not have a 31 March year end will need to apportion their qualifying R&D expenditure pre and post 1 April 2023 accordingly.
The change in rates alone is expected to significantly affect existing claimants’ budgets and cash flow, with an overnight boost to companies claiming under the RDEC scheme. For example, a loss making company claiming under the RDEC scheme will be able to claim an additional £4,470 for every £100,000 of qualifying expenditure. However, for the majority of loss making companies who claim under the SME scheme, there will be a tax credit reduction of £14,750 for every £100,000 of qualifying expenditure.
Data and cloud computing
From 1 April 2023, qualifying expenditure will be extended to include data and cloud computing costs. A “data licence” is a licence to access and use a collection of digital data. “Cloud computing services” include the provision of access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities.
From 1 April 2023, projects seeking advances in pure mathematics will also qualify and have historically been excluded from the definition of qualifying R&D activities.
Pre-notification of claims
For accounting periods starting on or after 1 April 2023, companies making their first R&D claim or those which have not claimed within the previous three accounting periods must inform HMRC of their intention to make a claim within six months of the end of the accounting period to which the claim relates.
If no pre-notification is made within six months of the end of the accounting period for these companies, it will not be permitted to make a claim for that period. Companies that have claimed in one of the preceding three periods will not need to pre-notify.
Additional supporting information
From 8 August 2023, all R&D claims will have to be made digitally and provide a breakdown of the costs claimed across the qualifying categories of expenditure and provide a description of the R&D activities undertaken.
Each claim will also need to be endorsed by a named senior officer of the company and claims will need to include details of any agent who has advised the company on the claim.
From 1 April 2024, overseas expenditure on subcontractors and externally provided workers will no longer qualify, subject to limited exceptions such as geographical, environmental or social conditions, or legal or regulatory requirements which mean the work cannot be carried out in the UK. This change was originally due to come into effect from 1 April 2023, however it has since been delayed a year by HMRC.
This post was written by Gemma Thake, a Tax Partner at Price Bailey. Price Bailey has extensive experience with R&D tax relief. If you have any questions on the above or related to making an R&D claim, you can contact Gemma using the form below.
Calculate your own potential R&D tax relief
Our calculator tool is designed to provide a useful estimate of potential claim value only. It does not constitute nor replace the need to seek professional advice.
Your exact return will depend on a large number of factors specific to your particular business and your particular scenario, in addition to needing to undergo a thorough review of qualifying expenditure, proportionality and other factors such as the use of subcontractors in R&D activities.
The important thing is to seek advice as soon as possible. The claim and calculation process itself can be complex, so talk to your professional advisers about the steps you need to take.
If you want to understand further what these changes might mean for you, or you are claiming for the first time and would like our support in calculating and filing your claim, then please get in contact with our team using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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