Changes to the R&D tax relief scheme

Changes to the R&D tax relief scheme

In this article we will address the changes to the UK’s Research & Development (R&D) scheme which will take effect from 1 April 2023. The reform has come about in part due to HMRC’s concerns about fraudulent claims within the R&D sector and the activities of “unregulated rogue advisers”.

In a future article, we will provide an insight into R&D Tax Relief, how it works and what expenditure can be claimed.   If you would like to discuss new R&D opportunities with us, please contact us at info@rpg.co.uk

The key changes to the R&D tax relief scheme which take effect from 1^st April 2023 relate to:

1. The rate of R&D tax relief for each scheme
2. The qualifying R&D expenditure categories on which claims can be made
3. The R&D claim process itself

 

1. Rate of tax relief

There are significant changes to the rates of R&D Tax relief for each scheme.

• R&D – SME Scheme

The expenditure uplift is reduced from 130% to 86% and the repayable tax credit is reduced from 14.5% to 10%.

It is probably more meaningful to look at the difference between the “effective” R&D Tax credit rates. For profitable companies the rate is reduced from 25% to 21.5% and for loss making companies from a maximum refund of 33% to 18%.

The table below shows the example of a loss making company demonstrating the difference the change in rates would make on R&D expenditure of £250,000.  You will see that, on this amount, the refund falls from £83,375 to £46,500.

This is a highly significant change and we understand that it represents the Government’s desire to invest more funds into the RDEC scheme which applies to larger companies as opposed to the SME scheme.

It is worth noting that the Proposed Changes column also reflects the new corporation tax rate of 25% which is the expected rate from 1^st April 2023.

 

R&D Example – Loss Making Company
	Current Rates	Proposed Changes
Qualifying R&D expenditure	£250,000	£250,000
R&D Enhancement (current 130%, proposed 86%)	£575,000	£465,000
Surrenderable rate for  repayment	14.5%	10%
Tax credit refund	£83,375	£46,500
Effective R&D tax credit rate	33%	18.6%

 

In the example of a profitable SME, the reduction in corporation tax due would change from £61,750 to £40, 850 at the new rates.

 

R&D Example – Profitable Company
	Current Rate	Proposed Changes
Qualifying R&D Expenditure	£250,000	£250,000
R&D Enhancement (current 130%, proposed 86%)	£325,000	£215,000
Corporation Tax Rate	19%	25%
Reduction of corporation tax due	£61,750	£53,750
Effective R&D Tax Credit Rate	25%	21.5%

 

• R&D – RDEC Scheme

R&D expenditure credit (RDEC) is generally available to “large companies” and it uses a different way of calculating the corporation tax relief, although it can be used by SME’s in certain circumstances, for example those sub-contracted by large companies.

The rate changes to the large company scheme are as follows:

 

Before April 2023	From April 2023
RDEC credit rate: 13% Corporation tax rate: 19% Effective R&D Tax Credit Rate: 10.5%	RDEC credit rate: 20% Corporation tax rate: 25% Effective R&D Tax Credit Rate: 15%

 

2. The qualifying R&D expenditure categories that can be claimed

There are changes to the types of qualifying expenditure that can be claimed on or after 1^st April 2023.

• Overseas expenditure – Subcontracting & Externally Provided Workers (‘EPWs’)

New conditions will be applied from 1^st April 2023 requiring sub-contracted activities to take place in the UK and any externally provided workers ( EPWs) will need to be subject to UK PAYE.  There will be exceptions to this in limited circumstances.

• Computer Software Costs

At the moment R&D relief can be claimed on computer software used directly for R&D purposes (primarily software licence fees) but will be extended to include the cost of data licences and cloud computing.

Companies will be able to claim expenditure on license payments for datasets/hosting costs and for computation/data processing software.

 

3. The R&D claim process

Any company that has not made either an R&D claim or claim notification in any of the previous three accounting periods must make an advance pre-notification claim within 6 months of the end of the relevant accounting period or their claim will be invalid.

This is a new online pre-notification requirement, requiring the company to inform HMRC of its intention to make an R&D claim, naming the R&D adviser it will be using, the costs and the workers involved. The claim will need to be endorsed by a named senior officer of the company.

Each claimant company will be required to complete an R&D report detailing the nature of the R&D activities the company has conducted during the claim period.

As this measure applies to first time claimants they will need to consider very quickly whether any of their expenditure may qualify for R&D relief and therefore whether a “protective” pre-notification should be made within the 6 month period.

Companies cannot delay making claims otherwise they will not be allowed.

HMRC have made a particular point of asking for the name of the R&D tax adviser as part of the pre notification process. This is partly because of their concerns about a small number of potentially unscrupulous specialist R&D claims companies.

Next steps

The RPG R&D tax team comprises Chartered Tax Advisers and Chartered Accountants who follow the same rigorous regime as all of our colleagues at RPG Chartered Accountants which is fully regulated by the ICAEW.

We would be very happy to discuss with you any queries regarding R&D tax relief; also to advise and assist you through the whole claims process.  Simply call 0161 608 0000 or email info@rpg.co.uk

Authored by Ryan Witter – Tax Manager at RPG Chartered Accountants