Wednesday 15th March saw the government’s Spring Budget 2023. We expected some changes to the R&D Tax regime, but we’re surprised by the number of changes we got – with some that were announced no more than six months ago, being reversed or delayed.
Extending qualifying expenditure
To incentivise R&D using modern mathematical approaches, the government is extending the scope of qualifying expenditures to include the costs of datasets and cloud computing.
They’re also making changes to the definition of R&D for tax relief to remove the exclusion of pure mathematics. This provides further support for cutting-edge R&D.
Restrictions for overseas subcontractors
To ensure the maximum benefit to the UK from the spill over of R&D activity incentivised by these reliefs – relief for subcontracted work, and the cost of externally provided workers, will be limited to UK activity.
There’ll be some very narrow exemptions for factors such as geography or regulatory requirements, but these exemptions will not include cost, or workforce availability.
This will now come into effect from 1 April 2024, instead of 1 April 2023. It gives the government time to consider the interaction between this restriction and the design of a potential merged R&D relief.
At the Autumn Statement 2022, the Chancellor reduced the enhanced deduction for SMEs from 130% to 86%. He also reduced the payable credit from 14.5% to 10%, for costs incurred on or after 1 April 2023.
This stands, however, there’s a new rate for “Intensive R&D” companies, which provides the original 14.5% payable credit rate for high intensity R&D companies.
A company will be “R&D Intensive” where 40% of its total expenses incurred over the accounting period qualify for relief under the SME or RDEC scheme.
For loss-making “R&D intensive” SMEs, this is worth 27p to the £1 of eligible expenditure. This marks a slight decrease from the old rate (33p), but much better than the new standardised rate (18.6p), which comes into effect on 1 April 2023.
Companies can claim the credit in the same way as they already do, in their Corporation Tax (CT) return.
As this change will be legislated in a future Finance Bill, companies are only able to claim relief at a later date, once legislation is in place. This means that there may be a delay in receiving the full tax credit.
Additional information requirement
To tackle abuse of the reliefs, all claims to the R&D reliefs — either for a deduction or a tax credit —will have to be made digitally.
Your digital claims need to include a breakdown of costs across qualifying categories and a brief description of the R&D. Each claim needs to be endorsed by a named senior officer of your company, and include details of any agent who has advised you to compile the claim.
Companies will also need to notify HMRC, in advance, if you plan to make a claim. You’ll needs to do this via a digital service within six months of the end of the period to which the claim relates. Companies that have claimed in one of the preceding three periods will not need to pre-notify.
The Additional Information form goes live as of 1 August 2023 and the notification requirement is live for periods beginning on or after 1 April 2023
If you have a query about any changes to Research & Development Tax Relief, contact our team today at firstname.lastname@example.org.