There has been a raft of R&D tax relief changes over the last six months. In this article, the ForrestBrown team provide an overview of these 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 R&D tax relief changes
In March’s Spring Budget, the government announced its tax and spending plans. These included several changes to R&D tax relief.
Impacting expenditure from April 2023:
- SME rate changes
- RDEC rate changes
- Qualifying costs around data license, cloud computing and pure mathematics
- R&D claim pre-notification
Impacting R&D claims filed from 8 August 2023:
From April 2024
R&D tax credit changes 2023
Here is a detailed breakdown of the R&D tax relief changes introduced by the government including what they are, when they will come into place and their potential impact.
Click to read more on how we got to this point and the full story on the latest R&D changes, and their significance.
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.
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.
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).
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
We drew attention to new requirements regarding pre-notification in our example below of the way measures have subtly changed as they progress from draft legislation to published guidance.
Companies will 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.
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Changes impacting R&D claims filed from 8 August 2023 – regardless of accounting period
The following changes will impact those businesses filing R&D claims from 8 August 2023.
Mandatory additional information
From 8 August 2023, all claims will 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 impacting accounting periods beginning on or after 1 April 2024
The following changes are currently set to 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 has been pushed back by 12 months. As it stands, 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.
Measures still in the pipeline
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, with responses now being considered with a view to implementation as soon as April 2024.
At a glance guide – timeline of R&D tax changes
1 April 2023
Expenditure incurred on or after 1 April 2023
SME rate changes
- Additional deduction reduced from 130% to 86%.
- Credit reduced from 14.5% to 10% (except for R&D intensive SMEs).
RDEC rate change
- Gross RDEC increased from 13% to 20%.
Accounting periods beginning on or after April 2023
Data licence & cloud computing costs
- New category of qualifying expenditure
- New qualifying activity (previously specifically excluded from the definition of qualifying R&D activity).
- Companies will need to notify HMRC within 6 months of their year end if they intend to make an R&D claim, unless they have submitted a claim in the last 3 years.
1 August 2023
Claims filed from 1 August 2023 (regardless of accounting period)
Mandatory additional information
- From 1 August 2023, claims will not be valid unless an additional information form has been filed providing details of the company, costs and projects being claimed.
1 April 2024
Accounting periods beginning on or after 1 April 2024
Delayed by 12 months
Restricted of overseas R&D expenditure
- Subcontractor costs will only be eligible if the work is performed in the UK.
EPW costs will only be eligible if subject to UK PAYE.
RDEC for all
- Proposal for a single scheme merging the current SME and RDEC incentives.
Other changes from 1 April 2023 (Not R&D specific)
- Return of a main rate (25%) and a small profits rate (19%) of Corporation Tax, and marginal relief for companies with profits between £50k and £250k.
- Capital allowances: full expensing (100% relief) for capital expenditure on qualifying plant & machinery between 1 April 2023 and 31 March 2026.
Other changes aimed at tackling abuse
- Mandatory digital filing of claims.
- Senior officer endorsement.
- Disclosure of R&D agent.
- HMRC power to remove claims where the pre-notification or additional information requirements have not been met.
The story so far – how we got to this point
It’s more than three years since the government began a review of R&D tax reliefs and much has changed. The Chancellor who launched the consultation is now Prime Minister and, while the promised ‘root and branch’ review has not materialised, a steady stream of changes have been announced, with the pace of change increasing markedly in recent months.
This piecemeal approach has created uncertainty amongst businesses, making it difficult to plan future R&D investment with confidence. The way R&D tax relief changes have been implemented, with different timelines and subtle changes introduced to guidance at each stage, has added another layer of complexity.
A good example is the requirement for businesses to notify HMRC in advance in order to make an R&D tax relief claim:
· Initial draft legislation published in July 2022 stated companies would need to notify if they haven’t claimed in the previous three accounting periods.
· In the subsequent draft guidance from HMRC (published in December 2022), the wording was changed to refer to the previous three calendar years.
· This wording underwent further transformation in a document published alongside the Spring Budget (on 15 March 2023), which stated that companies would need to notify HMRC if they hadn’t claimed for a period of three years ending with the day before the first day of the claim notification period.
· Then, finally, the Finance Bill published a week later referred to a period of three years ending with the last day of the claim notification period.
What these seemingly minor changes actually mean is that the window for notification has reduced significantly: the change of a single word between the third and fourth bullet points above reduced the window by 18 months.
Following this trail to reach the right conclusion takes time and effort, with many businesses likely to be left confused or misinformed on the requirements for notification. This creates potential for businesses who should be rewarded for their investment in R&D to miss out on a vital source of funding.
With Tax Administration and Maintenance Day having now passed without any announcements we still need a better picture of how the latest R&D changes will be implemented. Businesses need greater clarity – at least until details of a proposed single scheme for R&D tax relief are announced this summer.
ForrestBrown’s view on R&D tax relief changes – time to take stock
Businesses have a window of opportunity to make sure they are up to speed with the latest guidance before the anticipated introduction of a single scheme in April 2024.
If you want to find out more about how ForrestBrown can support your business through these changes and make the most of your innovation then contact us today.
By partnering with us, you will benefit from our 130-strong multi-disciplinary team, made up of qualified chartered tax advisers, accountants, lawyers, industry sector specialists and former HMRC inspectors. We offer unmatched technical expertise and are passionate about helping innovative businesses grow.