There have been many changes made to the UK R&D tax relief schemes. Much of what was previously mooted by the Government has now been ratified and some additional details on how the changes will work are available.
Headline summary:
- Most striking is that R&D claim rate changes mean that the value of the small company (SME) R&D tax relief and the large company (RDEC) relief is now virtually the same.
- The exclusion of subcontractor costs for foreign-based subcontractors and foreign-based staff suppliers has not yet been introduced.
- From 1 August 2023, an additional compulsory information form (available online) must accompany all R&D claims.
- There is a new requirement to give Advance Notification of an R&D claim (applicable to new and infrequent claimants).
The details:
SME R&D claim rate changes – the Small & Medium Enterprise (SME) Research & Development (R&D) enhancement rate, which is used to calculate the additional R&D offset against corporation tax, reduced from 130% for qualifying R&D expenditure up to 31st March 2023, to 86% for R&D expenditure thereafter. This means that companies offsetting profits will see the value of the extra R&D deduction reduce from just under 25p to just over 16p per pound spent on R&D, assuming a 19% corporation tax rate, rising to 21p where the 25% corporation tax rate applies.
The SME payable tax credit rate, which is the rate used to calculate the value of the cash payment available for loss-making companies, was also reduced. It is 14.5% for R&D expenditure up to 31st March 2023 and 10% for expenditure thereafter (except for R&D intensive companies – see below). This means the value of the maximum payable tax credit has reduced from 33p to 19p per pound spent on R&D.
R&D-intensive SMEs will retain the 14.5% payable tax credit rate, meaning the value of the maximum payable tax credit for these companies will be 27p per pound spent on R&D. R&D-intensive companies are defined as loss-making companies where qualifying R&D expenditure is more than 40% of all revenue expenditure in the relevant claim period.
RDEC (Research & Development Expenditure Credit) claim rate change – from 1st April 2023 the RDEC claim rate (applicable to companies or groups of companies with over 500 employees) has increased from 13% to 20%. Claims are worked out differently under the RDEC scheme as the tax credit is an above-the-line receipt that is taxable. This means the post-tax value of an RDEC claim rises from just under 10p per pound spent to 15p per pound spent. RDEC is relevant to all companies or groups of companies with over 500 employees and SMEs in respect to any grant-funded or subsidised R&D expenditure.
Other changes:
New categories of qualifying expenditure – for company accounting periods starting 1st April 2023 or later, expenditure on data and all cloud costs incurred directly for R&D will be allowable as qualifying expenditure.
Pure mathematics as a qualifying activity – for company accounting periods starting 1st April 2023 or later, the definition of R&D for tax reliefs will be expanded to include all mathematics – clarifying in particular that ‘pure maths’ can qualify.
Use of foreign-based subcontractors and foreign-based staff suppliers – it was expected that R&D expenditure associated with using foreign-based sub-contractors or foreign-based staff would no longer be allowed for accounting periods starting on or after 1st April 2023. But this change has now been postponed and is expected to come into effect for accounting periods starting on or after 1st April 2024.
Digital submissions using compulsory additional information forms – it has been possible to submit an R&D claim by email or post and while HMRC set out what information needed to be provided, it was not compulsory to provide any supporting information. This will no longer be the case. As part of ‘tackling abuse and improving compliance’ – from 1 August 2023 all claims must be made digitally using compulsory additional information forms.
The additional information required includes:
- A cost breakdown across qualifying categories of expenditure.
- A description of the R&D.
- The name of an endorsing senior officer from the claimant company.
- The details of any agent who has advised the company on compiling the claim.
Advance notification of making a claim (for new and infrequent claimants) – companies will need to inform HMRC, in advance, that they plan to make an R&D claim. The notification will be via a digital service and will need to be done within 6 months of the end of the period of account to which the claim relates. But claim notification will only be required for new claimants; or where a company has not made an R&D claim during the period of three years ending with the day before the first day of the claim notification period.
Get in touch if you would like to discuss how the changes may impact your claims.