R&D Tax Relief, Taxation
Spring Budget 2023: Impact on R&D incentives
Government tax incentive schemes have been a contentious talking point in recent years, with HMRC acknowledging the issues faced with preventing fraudulent claims and abuse of the Research & Development (R&D) scheme.
The 2022 Autumn Budget focused on tightening the noose on these offenders. Whether blatant fraudsters, individuals and firms inadvertently abusing the scheme, or legitimate R&D claimants, the recent changes see legitimately innovative SME claimants punished equally for the actions of the few.
The Chancellor’s 2023 Spring Budget statement directly addresses the necessity to support UK R&D “An important part of ensuring prosperity is encouraging more businesses to invest in R&D, helping them to create the technologies, products and services which advance living standards.”
The suggested intent in this message is resonated in a selection of the R&D scheme changes announced in the two recent budgets, such as the increase in generosity to Research and Development Expenditure Credits (RDEC, for Large Companies) as well as a £1.8 billion package of support allocated to R&D intensive loss-making SMEs.
The government has also modernised its view on what constitutes as R&D within the software space, aligning with how bleeding edge tech firms are designing novel technologies with AI and Machine Learning techniques (as well as mathematics and data science). The high costs associated with developing technologies on cloud-hosted platforms has also been addressed, with cloud computing and data costs qualifying for R&D Tax Relief from 1 April 2023. The government will be concurrently launching an AI sandbox to trial new approaches to get AI products to market quicker.
How does this affect my business?
Over recent years, HMRC has been hiring additional compliance officers to crack down on the number of ineligible claims paid out. An additional step requirement, for claims submitted after 1 August 2023, is that R&D advisers will need to provide more information to support R&D claims. This means that all claims should be submitted with a report detailing the claim methodology used, including in-depth technical detail of the R&D activities completed on qualifying projects.
Although Gerald Edelman welcomes increased compliance checks to combat abuse of the R&D scheme, more procedures could be put in place to directly target suspicious R&D outfits and companies to reduce the risk of fraudulent claims.
Gerald Edelman has a team of in-house R&D Tax experts with decades of combined experience in the industry. We have developed extensive knowledge and in-house processes to help innovative businesses get the best value from their R&D with reduced risk. The new legislation has increased the scope and complexity of the work involved in preparing robust claims – ensure you have full confidence in your claims by using an experienced R&D provider.
Tips for companies planning on claiming R&D Tax Relief
- Companies with accounting periods starting on or after 1 April 2023 and claiming R&D Tax Relief for the first time (or haven’t claimed in the last three accounting periods) will need to pre-notify HMRC of their intent to claim within six months of the end of the accounting period being claimed.
- Ensure you have sufficient evidence to support your claim and provide this to HMRC alongside the tax computation submission.
- Provision of additional information forms will be compulsory for all claims from 1 August 2023.
- Contact your cloud hosting providers to obtain a detailed breakdown of the costs that can now be claimed for cloud computing data costs as this is a requirement.
- Don’t fall into any traps in the legislation and have experienced R&D agents complete your claims.
Redemption for R&D intensive loss-making SMEs
As announced in the Autumn 2022 statement, the generosity of the SME tax credit scheme will greatly be reduced on 1 April 2023 through:
- a reduction in the R&D uplift from 130% to 86%
- reducing the payable tax credit for loss making SMEs from 14.5% to 10%
The effective relief for profitable SMEs will drop from 24.7% to 21.5% accounting for the increase in Corporation Tax to 25% on 1 April 2023. SME R&D Tax Credits are impacted much worse, with the effective relief received going from the current 33.35% rate down to 18.6%, a reduction of almost half.
In the Spring Statement, however, the government devised an exception to this rule, specifically for R&D intensive loss-making SMEs claiming R&D Tax Credits. The government defines ‘R&D intensive’ in this scenario as a company with qualifying R&D expenditure that constitutes at least 40% of total expenditure. These companies will be able to claim the tax payable credit at the previous 14.5% instead of the 10% credit rate from 1 April 2023.
This amendment will benefit young start-ups, with additional financial aid during the early stages of the R&D lifecycle before they can market their product. However, this additional benefit will be short-lived for fast growing companies, which will lose this higher rate of relief as their turnover grows.
Legislation to increase the rate of relief will not be in place until 1 August 2023, so companies will have to wait until this date to complete their submission or claim at the current lower rate in the meantime.
Unscathed in the Spring Statement, the RDEC rate increase from 13% to 20% announced in the Autumn Budget will go ahead for expenditure incurred on or after 1 April 2023. How long this scheme will last in its current state, however, is dependent on the responses collected from recent consultations held by the government on merging the R&D Expenditure Credit (RDEC) scheme and SME schemes which closed on 13 March. The government is set to release draft legislation on the merged scheme alongside the draft Finance Bill in Summer 2023.
Overseas worker expenditure restrictions delay
The previously announced restrictions on expenditure for overseas subcontractors has been delayed, now coming into effect from 1 April 2024 instead of 1 April 2023. The government has explained this delay is to allow them time to consider the interaction between this restriction and the design of the merged RDEC and SME scheme.
If you would like further guidance with R&D, please contact our expert team today.