There has been a raft of R&D tax relief changes over the last 18 months. This article provides an overview of the most significant reforms.
Whether you’re a CEO, an accountant, business owner, CFO or Head of Tax, now is the time to familiarise yourself with these R&D tax changes and how they will be implemented. Make sure your business continues to benefit from this vital source of funding and be rewarded for investing in R&D.
Overview of changes
In the November 2023 Autumn Statement, the government updated its tax and spending plans. This included confirmation of several changes to R&D tax relief and more details on how these would be implemented.
From April 2024
From 8 August 2023:
From 1 April 2023
- SME rate changes
- RDEC rate changes
- Qualifying costs around data license, cloud computing and pure mathematics
- R&D claim pre-notification
Changes impacting accounting periods beginning on or after 1 April 2024
The following changes impact accounting periods beginning on or 1 April 2024.
Overseas R&D restrictions
This change was originally due to come in for accounting periods beginning on or after 1 April 2023 but was pushed back by 12 months. From 1 April 2024, third party costs will only be eligible if, for subcontractors, the work has been performed in the UK, and for Externally Provided Workers (EPWs) if the payments are subject to UK PAYE.
It is worth noting this change only impacts third party costs. Directly employed staff based overseas will not be impacted.
As currently drafted, there will be some limited exceptions in circumstances where it would be wholly unreasonable to undertake the R&D in the UK due to either geographical, environmental or social factors, or where legal or regulatory requirements require activity to take place in specific territories.
Cost and workforce availability are both explicitly ruled out as reasons for overseas expenditure to qualify.
Follow the link for a full breakdown of the changes to overseas R&D.
Draft guidance has been published on these changes.
Merged scheme for R&D tax relief
When the SME and RDEC rates were ‘rebalanced’ in the Autumn Statement 2022, the government noted this was a step towards a single scheme. An initial round of consultation on the design of such a scheme followed. Despite calls to delay implementation to allow businesses more time to prepare, the government confirmed the scheme would come into force for accounting periods beginning on or after 1 April 2024.
Find out more at our dedicated merged scheme resource.
Changes impacting R&D claims filed from 8 August 2023 – regardless of accounting period
The following changes were introduced for businesses filing R&D claims from 8 August 2023.
Mandatory additional information
From 8 August 2023, all claims need to be accompanied by an additional form. This form will need to submitted before the claim, with information required including the company’s UTR, PAYE reference, VAT number and SIC code. Details of any R&D agent used and contact details for the senior officer responsible for the claim will also need to be provided, along with a selection of case studies
Other changes aimed at tackling abuse
Digital filing has also become mandatory – although ForrestBrown already adheres to this requirement.
HMRC has also acquired the power to remove claims if companies fail to comply with the pre-notification and/or additional information requirements. In such instances, companies will have 90 days to appeal by sending written representations to HMRC for consideration.
Changes to R&D tax relief for accounting periods beginning on or after 1 April 2023
The following changes apply to accounting periods beginning on or after 1 April 2023.
Data licence and cloud computing costs
A new category of qualifying expenditure covering data licence and cloud computing costs has been introduced, but can only be claimed where directly relevant to R&D (not for Qualifying Indirect Activities).
Pure mathematics
A new qualifying activity – pure maths – has been added to the guidelines on R&D for tax purposes. Previously this was specifically excluded from the definition. Mathematical techniques are frequently used in science, and from 1 April 2023, mathematical advances in themselves are treated as science for the purposes of R&D tax relief.
For more on pure mathematics, data licences and cloud computing costs and R&D tax relief see our blog.
R&D claim pre-notification
Companies are now be required to notify HMRC in advance if they intend to make an R&D claim (not before the R&D is carried out, as some have mistakenly assumed). The deadline for making the notification is six months after the end of the accounting period they wish to make a claim for.
However, companies will not need to notify if they have submitted a claim in the three years ending on the last day of the notification period.
Changes relating to R&D expenditure incurred on or after 1 April 2023
A raft of changes has now come into force for expenditure incurred on or after 1 April 2023. Companies with a year-end which straddles this date will need to apply the changes on a pro-rata basis.
SME rate changes
Changes to the rate for SMEs were announced in the Autumn Statement 2022. The additional reduction was reduced from 130% to 86% and credit reduced from 14.5% to 10% of surrenderable losses (which are now the lower of actual losses and 186% of qualifying expenditure).
However, Spring Budget 2023 introduced an exception for R&D intensive SMEs, defined as companies who spend at least 40% of their total expenditure on qualifying R&D can continue to claim a credit of 14.5%.
This means the maximum effective benefit reduces from 24.7% to 21.5% for profitable SMEs, from 33.35% to 18.6% for loss-making SMEs, and from 33.35% to 27% for loss-making R&D intensive SMEs. Find out more about ERIS and the support for loss making intensive SMEs.
RDEC rate change
Also announced in the Autumn Statement 2022, an increase in the gross RDEC rate from 13% to 20% was the other half of the equation in the Chancellor’s ‘rebalancing’ of R&D tax relief incentives.
The effective (net) benefit will depend on the company’s marginal rate of Corporation Tax but for main rate taxpayers it will increase from 10.53% to 15%. The increase in benefit for small profits rate taxpayers and marginal rate taxpayers will be slightly higher.
Find out more about ForrestBrown’s RDEC service for large companies.
Other changes
Beyond R&D tax relief, relevant changes for innovative businesses include the return of a main rate and small profits rate of Corporation Tax (with effective benefit implications for both SME & RDEC).
Full expensing for capital allowances has also been introduced, with a 100% First Year Allowance on qualifying assets (main rate plant and machinery) between 1 April 2023 and 31 March 2026. Special rate assets are eligible for 50% FYA during this period.
To better understand the impact of these changes on your R&D tax relief claim try our updated R&D tax calculator.
Changes to R&D tax relief for accounting periods beginning on or after 1 April 2023
The following changes will impact claims for all businesses with accounting periods beginning on or after 1 April 2023.
Data licence and cloud computing costs
A new category of qualifying expenditure covering data licence and cloud computing costs has been introduced, but can only be claimed where directly relevant to R&D (not for Qualifying Indirect Activities).
Pure mathematics
A new qualifying activity – pure maths – has been added to the guidelines on R&D for tax purposes. Previously this was specifically excluded from the definition. Mathematical techniques are frequently used in science, and since 1 April 2023, mathematical advances in themselves are treated as science for the purposes of R&D tax relief.
For more on pure mathematics, data licences and cloud computing costs and R&D tax relief see our blog.
R&D claim pre-notification
Companies are now required to notify HMRC in advance if they intend to make an R&D claim (not before the R&D is carried out, as some have mistakenly assumed). The deadline for making the notification is six months after the end of the accounting period they wish to make a claim for.
However, companies will not need to notify if they have submitted a claim in the three years ending on the last day of the notification period.
Let ForrestBrown’s expert team help you navigate the changing landscape for R&D tax relief
We’d love to find out more about your business to see how we can support you. Speak to our expert team today.