Preparing for the R&D tax relief changes – 2023 Spring Budget R&D reforms

Good news for companies claiming under the Research and Development Expenditure Credit (‘RDEC’) regime, bad news for companies claiming under the Small & Medium Enterprise (‘SME’) regime.

From 1 April 2023, SME enhanced deduction rates reduced from 130% to 86%, as well as the surrenderable credit rate reducing from 14.5% to 10%. These changes were justified as being driven by a need to address issues of abuse and error within the SME regime, which were deemed to have been encouraged largely by the attractive benefits of the regime.

On the other hand, the Research and Development Expenditure Credit (RDEC) regime credit rate was increased from 13% to 20% from 1 April 2023. The RDEC regime is available to both large companies and SMEs. This aims to make the UK RDEC regime more competitive internationally, whilst keeping control of the costs of R&D incentives.

Considering the increase in the rate of Corporation tax to 25% from April 2023, the cash impact on R&D tax benefits of the proposed changes on profitable companies will be a reduction from a maximum of 24.7 pence to 21.5 pence in the pound for the SME scheme (for an SME taxable at 25%) and a reduction for loss making companies from 33.35 pence to 18.6p in the pound.

There is, however, an increase from 10.5 pence to 15 pence in the pound for the RDEC scheme.

Additional Qualifying Expenditure Categories

For accounting periods starting on or after 1 April 2023, two additional cost categories will be eligible for R&D tax relief: data licences and cloud computing.

Revenue expenditure on licenses to access and use digital data and data sets will become eligible for R&D tax relief. Likewise, in-house staff costs relating to data collection which is employed directly in qualifying R&D activities will be eligible for R&D tax relief.

It is important to note that cloud computing services include the provision of, access to, and maintenance of, remote data storage and hardware facilities and operating systems and software platforms.

Pure Mathematics to be included in definition of R&D for tax purposes

Previously, it has not been possible to submit an R&D claim in relation to advances in pure mathematics itself since the definition did not include such activities. However, from 1 April 2023 the BEIS guidelines have been updated to specifically state that activities relating to pure mathematics now meet the R&D definition and can be included within R&D claims going forwards.

Refocus on UK R&D Activities

The 2023 Spring Budget announced a delay to the proposed plans on restrictions to overseas R&D activities. The stricter rules for R&D activities undertaken outside of the UK will now apply for accounting periods beginning on or after 1 April 2024.

Where expenditure is undertaken outside of the UK, these costs will only qualify for R&D relief when the following three factors apply:

  • The conditions necessary for the R&D are not present in the UK; and
  • The conditions are present in the location where the R&D is undertaken; and
  • It would be wholly unreasonable to replicate the conditions in the UK

HMRC's requirement to notify form

For accounting periods beginning on or after 1 April 2023, certain companies will be required to ‘notify’ HMRC if they plan to claim Research and Development (R&D) tax relief or expenditure credit for accounting periods if the following applies:

  • (a) the company is making an R&D claim for the first time, or
  • (b) the company made an R&D claim for the previous accounting period, but did not submit that claim within the claim notification period, or
  • (c) the company’s last R&D claim was submitted more than three years before the end of the claim notification period.

The claim notification period runs for a three year period ending 6 months after the end of the period of account containing the accounting period for which a claim is to be made.

The last date that a claim notification form must be submitted to HMRC is 6 months after the end of the period of account that the claim relates to. If the form is not submitted by this deadline, the claim will not be valid and HMRC will remove any R&D claim from the CT returns.

The form will require certain information to be provided and further information in relation to the advanced notification period can be found here.

HMRC’s additional information form

From 8 August 2023 all companies (including large corporates assigned a Customer Compliance Manager at HMRC) must complete and submit an additional information form to HMRC to support all their claims for Research and Development (R&D) tax relief or expenditure credit.

Similar to the notification requirement, companies will need to complete and digitally submit to HMRC the additional information form via HMRC’s online portal prior to submitting the company’s CT return.

Failure to do so will result in HMRC writing to the company to confirm that they have removed the claim for R&D tax relief from the Corporation Tax return.

HMRC have recently published their guidance in respect of the additional information form requirements, which can be found here.

It is important to stress that whilst the additional information requires a comprehensive level of detail to complete, it should not be seen as a replacement to an R&D report that properly evidences the basis for which an R&D claim can be made. The additional information form is seen as an extra measure brought in by HMRC to improve their assessment of submitted R&D claims. Companies should still have appropriate evidence to fully support their R&D claim, and the best means of doing this is to have a detailed R&D report in addition to the new form.

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We have a wealth of tax professionals who are experts in R&D, able to assist in navigating these changes and offering peace of mind over your claims. If you have any queries, please do not hesitate to contact a member of the team.

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