R&D changes in 2023
HMRC’s R&D tax relief schemes have been subject to change, with many of the new rules and rates being implemented from 2023. The changes were announced across both the Autumn Statement 2022 and Spring Budget back in March this year.
Both the small company scheme and large company (RDEC) scheme have rate changes, which will apply to all expenditure incurred on or after 1 April 2023. This means if your claim spans this date, expenditure will need to be separated in order to apply the correct rate of relief to each period.
SME R&D rate changes – In the Autumn Statement the Chancellor reduced the rates for SMEs claiming R&D tax relief. The enhanced deduction for SMEs was reduced from 130% down to 86%, and the amount of tax credit was reduced from 14.5% down to 10%. Some of the reduction to the scheme will be mitigated by the increase in Corporation Tax rate for some businesses up to 25% from April 2023
To help bring some context to these rate changes for SMEs, we have provided an example below where the company has £100k of expenditure.
RDEC R&D rate changes – For businesses claiming under the RDEC scheme, the tax credit rate has increased from 13% to 20%. This percentage increase, along with the increase in Corporation Tax rate for some businesses up to 25% from April 2023, will result in a more generous relief for businesses who fall into the RDEC scheme, as seen in the example below where the company has £100k of expenditure.
Due to the new rates of relief under each scheme, the tax benefit to SMEs compared to companies who fall into the RDEC scheme, is now much closer.
1. Disclosure of agents
Companies must disclose details of any agent or adviser who has helped prepare their R&D claim. This will allow HMRC to track compliance checks against agents.
2. Named officer to support claim
A senior officer of the company making the R&D claim, must sign-off the claim and submit their details to HMRC.
3. Digital submissions
All claims submitted from 1 August 2023, will have to be made digitally, including a breakdown of costs and brief description of R&D.
4. Pre-notification of R&D
HMRC will require companies new to claiming R&D relief, or have not done so for their last 3 accounting periods, to pre-notify them if they are planning on making an R&D claim. Companies must notify HMRC within 6-months of their year-end.
5. Extensions to qualifying expenditure
Data and cloud computing costs have been added to allowable expenses for accounting periods starting on or after 1 April 2023. HMRC want to keep abreast of technological change by allowing companies to claim for the costs of acquiring datasets and for the cloud computing costs associated with storing, processing and analysing data, relating to their R&D claim.
Advances in pure mathematics will also become eligible. Previously, advances within pure maths weren’t counted as R&D for tax purposes. However, HMRC have responded to feedback during its R&D consultations, and have updated the Guidelines to allow claims to be made for advances in pure maths.
6. Incorrect scheme submission – SME to RDEC
For accounting periods starting on or after 1 April 2023, claims can be switched to RDEC if they were incorrectly submitted under the SME scheme. Where an SME’s R&D activity is subsidised, receives a State Aid, or the SME is subcontracted to perform R&D by a Large Company, their claim should be made through the RDEC scheme. Historically, if the claim was mistakenly submitted under the SME scheme, the company would risk losing their benefit. This new change means companies will be able to convert their claim from SME to RDEC instead of losing it, even after the window for changes has passed.
7. Preferential rates for “R&D intensive” businesses
Loss-making “R&D-intensive” SMEs will be able to claim for a more generous payable cash credit. This equates to £27 per £100 spent on R&D, rather than just under £19 for other companies. “R&D intensive” SMEs will be deemed to be those that spend at least 40% of their total expenditure on R&D.
This will apply to expenditure incurred on or after 1 April 2023. However, the legislation to implement the change has not yet been drafted or passed. HMRC have committed to releasing the draft legislation for consultation in the summer of 2023.
Companies who want to take advantage of the new rate can either;
- delay their submission until the legislation is in place, or
- submit right away under the lower rate, and then amend their submission after the legislation is in place.
If you have any questions regarding any of the above changes to the R&D schemes, please do not hesitate to contact us on the details below.