UK R&D Tax – Summary of changes from April 2023
As we approach April 2023, we wanted to cover the details on the latest changes in R&D tax legislation and how these amendments will affect R&D claims going forward. As experts in this field, we want to provide you with the latest information on what these changes mean for businesses in the UK. Hopefully, this will help you have a clearer understanding of these topics and assist you to plan your R&D roadmap accordingly.
WHY IS THE R&D TAX RELIEF REFORM HAPPENING?
The aim of the reform is twofold:
- To make UK a more attractive location for R&D investment – The UK government has an ambition to increase the overall R&D investment to 2.4% of the country’s GDP by 2027. R&D tax reliefs play an important role in incentivising innovation investments (through deductions of corporation tax or offering cash rebates). As a result, it is critical to keep the relief schemes competitive.
- To reduce fraudulent claims and abuse of the schemes, in order to ensure the tax relief schemes are well-targeted and providing financial support to those who really need it.
HMRC’s recent consultation on a few of the changes set out below closed on 28 February 2023. It is expected that the changes will apply to accounting periods started on or after 1 April 2023, and they will affect both the Small & Medium-sized Enterprise (“SME”) and Research & Development Expenditure Credit (“RDEC”) tax relief schemes. We will continue to monitor in this regard and provide updates accordingly.
What Rules are Changing?
- Extending qualifying expenditure
HMRC plans to extend and include costs of datasets and cloud computing as qualifying expenditure to support modern research methods. Specifically, the following costs will become eligible:
- Licence payments for datasets (but not those that can be resold or with an ongoing value to the business once R&D has been completed);
- Costs of staff involved in collating data that directly contributes to R&D; and
- Cloud computing costs that can be attributed to computation, data processing, and software.
Where payments have been made on a cloud computing package that includes a range of functions, the claimants will need to identify the costs that relate directly to R&D activities and exclude the costs incurred in non-R&D related activities. This can be assessed by reference to the billing details from suppliers or using an appropriate apportionment.
The UK Patent Box regime uses R&D definitions of qualifying expenditure as part of its calculations. As a consequence of the expansion of qualifying cost categories to include data and cloud computing costs, the relevant sections of the Patent Box rules will also require consequential amendment.
In addition, any research undertaken in the area of “pure mathematics” will become a qualifying R&D activity. This is to support the growing volume of R&D underpinned by mathematical advances in particular sectors such as AI, quantum computing and smart manufacturing.
- Refocusing R&D tax relief on activities performed within the UK
In an effort to retain R&D activities within the UK, payments made to Externally Provided Workers (“EPWs”) and subcontractors based outside the UK will no longer be eligible (albeit the UK -based EPWs/subcontractors who are subject to UK PAYE/NIC will still be eligible).
However, exemptions apply to where it was not possible to carry out the R&D work in the UK. For example:
- Materials/Geographical factors which restrict R&D to be undertaken abroad (e.g. deep ocean research); or
- Regulatory/environmental requirements which require R&D to be performed outside of the UK (e.g. clinical trials and medical studies in specialised patient groups, or developing equipment intended for extreme environments).
It is worth noting that, the proposed law explicitly removes the new restriction on overseas expenditures from the R&D 'nexus fraction' necessary to compute Patent Box relief. This implies that overseas R&D costs will still boost the proportion of tax relief that can be claimed under the Patent Box scheme.
- Tackling abuse of R&D tax reliefs
To assist HMRC in combating misuse of the R&D tax relief schemes, additional due diligence and filing processes will be put in place. To tackle abuse and improve compliance, the claimants will need to adopt the following administrative changes:
- The claims will need to be made digitally (except for those exempt from the requirement to deliver a Company Tax Return online, e.g. insolvent companies who are subject to a winding up order or in formal administration).
- Companies will need to provide a technical report to demonstrate how the costs and activities claimed are associated with R&D.
- New claimants will need to inform HMRC in advance that they intend to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates. The notification form will be available in HMRC’s website (Research and Development (R&D) tax reliefs - draft guidance - GOV.UK (www.gov.uk)) from April 2023.
Note that companies that have claimed (or made a notification) in one of the preceding three accounting periods will not be considered “new”, hence will not need to pre-notify. However, the New Claim Notification form will have to be submitted if a company’s accounting period changes prior to a claim being made, or if the company decide not to claim until a later date whereby if the next claim is made three years later, they will need to submit the notification form.
- Claims will need to disclose any agent advising the claimant on preparing the claim.
- Claims will need to be endorsed by a named senior officer of the claimant company.
- Additional measures to address anomalies and unforeseen consequences
The UK Government intends reshape the R&D rules to correct anomalies within the legislation that affect the operation of the reliefs. These include:
- Allowing claimants to file an updated claim within 30 days if HMRC rejects a claim under the RDEC regime. This assures that making an error in an RDEC claim does not result in the loss of the right to make a corrected claim (which was previously only possible for SME claims).
- Allowing companies to claim under the RDEC regime instead where they had previously erroneously claimed SME relief. This is permitted even if the time limit for amending claims has expired.
- Amending the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date. This will prevent companies which do not receive a notice to file (either because they fail to register or notify HMRC that they are dormant) from benefiting by having more time to make a claim.
- Supporting businesses growing and transitioning from SMEs to large companies. Traditionally, if an SME becomes a large company due to organic growth (as opposed to being acquired by another entity), the company itself is allowed to continue claiming tax relief under the SME scheme in the year of change, whereas other members of its group lose their SME status instantly. From April 2023, this transition rule will be available to all group companies.
- Where a company is no longer considered a 'going concern' merely due to the transfer of a trade to a connected party, but if it is otherwise financially sustainable, the company will still be entitled to claim R&D relief.
- Additional changes announced in Autumn Statement 2022
In addition to the above-mentioned new measures, the Chancellor also announced the following amendments in the Autumn Statement in November 2022 which will affect R&D tax relief schemes.
For expenditure incurred on or after 1 April 2023, the headline rates are changing as follows:
- The SME Scheme will have the additional deduction reduced from 130% to 86%.
- The SME credit rate will reduce from 14.5% to 10%.
- The RDEC rate will increase from 13% to 20%.
For SMEs, this is no doubt disappointing news. The new rates for the SME Tax Relief regime mean that, whilst the company can currently claim up to a maximum of c.33% of its R&D spend (as a cash repayment from HMRC), from April 2023 the maximum cash benefit will be reduced to just under 19%. However, for large companies, the increase in the RDEC rate is certainly welcoming news, further showing the Government’s commitment to R&D by implementing new measures to change how it funds innovation.
Through this rebalancing of the relief between the SME and RDEC schemes, the UK Government’s intention is to achieve a simplified single scheme for all claimant entities that is similar to the RDEC. The design of the scheme will be the subject of a future consultation.
Furthermore, the Government has confirmed that the Corporation Tax rate will rise to 25% from April 2023, with a system of tapered relief for companies with profits of between £50,000 and £250,000. The current 19% rate will still apply to companies with profits of £50,000 or below.
Assistance with your future R&D Claims
As the new amendments take effect, the scrutiny of R&D tax relief claims will be increased, and all claimant companies, especially those conducting R&D projects overseas, will need to consider the new rules.
At Invenics, we can assist you in planning your R&D tax relief claims and future R&D strategies, taking into account all the new changes enforced by HMRC. Our team of experienced R&D tax consultants has a thorough understanding of R&D tax regulations and changes in legislation.
Please contact us to understand how the R&D tax relief reform may impact your R&D claims
Relevant Government Websites
For more details of the changes, please refer to HMRC’s websites below.