Research & Development (R&D) Tax Relief

Research & Development (R&D) Tax Relief

There are a number of significant changes to R&D tax relief for UK businesses which have recently been announced, which will affect both SME’s and large organisations from 01 April 2023.

But before we look at the changes let’s explore ‘What R&D Tax Credits are?’

Put simply, the R&D Tax Credits Scheme is a tax incentive, which rewards businesses when they solve problems through innovation and developing new processes, or making significant enhancements that often they share for mutual benefit. Therefore, as a business when you spend money on a project / enhancement that qualifies as R&D, you can either get a cash reward or a reduction in the amount of Corporation Tax you pay.

Therefore, understanding how the new R&D tax reliefs could impact your business is important, so read on to find out more…..

R&D Tax Relief Rate Changes – (applicable for expenditure incurred on or after 01 April 2023)

With effect from 01 April 2023 the R&D expenditure credit (RDEC scheme) for larger companies increases from 13% to 20%.

This will mean that both profitable and loss-making RDEC claimants will get greater benefits from R&D Claims.

Before the changes on 01 April 2023 an RDEC claimant would get a net return of 10.53% on their R&D spend, this has now increased to 15% if you are a 25% corporation taxpayer (new corporation tax rules from April 2023) and 16% for a 19% corporation taxpayer (those with profits of £50,000 or less).

However, from April 2023, the SME additional deduction rate has decreased from 130% to 86% and the rate payable to SME’s has decreased from 14.5% to 10%, unless you are part of the ‘R&D Intensive’ SMEs as announced in the Spring Budget 2023.

So how will this change for SME’s making claims?

Before 01 April 2023, a profitable SME would get a net return of 24.7% on their R&D spend, this has now decreased to 21.5% for a 25% corporation taxpayer and 16.34% for a 19% corporation taxpayer.

Before the changes in April 2023, a loss-making SME would get a net return of 33.35% on their R&D spend. This has decreased to 26.97% for R&D Intensive companies and 18.6% for all others.

The scope of R&D has also changed

Qualifying expenditure on both subcontractors and externally provided workers (EPW’s)is restricted to UK expenditure.

This change will not come into effect until April 2024, but before then, those who are undertaking R&D need to be aware of it.

Qualifying expenditure for EPW’s will require proof that they are subject to PAYE and NIC, unless it is qualifying overseas expenditure.

Just to be clear, the qualifying expenditure on sub-contractors must meet one of the following 2 definitions.

  • UK expenditure – activities must take place in the UK.
  • Qualifying overseas expenditure – conditions necessary for R&D must be present in the overseas location, not present in the UK – examples given by HMRC include but are not limited to, tracking active volcanoes or deep ocean activities.

Please note – costs and availability of workers are not relevant conditions.

New claims from April 2023 have certain ‘administration requirements’ – what does this mean?

Companies which haven’t claimed R&D tax relief in the previous 3 years, along with first time claimants will be required to supply a claim notificationto HMRC.

This requirement has been introduced by HMRC to tackle ‘abusive R&D claims’ but inevitably it will also affect businesses who are doing genuine R&D but unaware they could be entitled to claim.

It is therefore important that you speak about your business regularly with your Account Manager.

A further requirement in efforts to tackle R&D fraud will be an ‘additional information form’ which must be submitted either with the R&D claim or before submission. Your accountant will still submit the claim as part of your corporate tax return.

There are still likely to be further changes – HMRC have recently consulted on a single R&D regime, which indicate that there will be just one scheme on the cards – whatever the outcome it is likely to come into effect from April 2024.

How can we help you with regards to R&D?

Talk to your Account Manager about your business, they will be able to assist by;

  • Identifying R&D and the relevant expenditure
  • Preparing the claim for HMRC

So maybe the main question is- Does your business qualify for R&D tax credits?

There are a few simple questions that will indicate whether your business is eligible for R&D Tax Credits.

Is your business:

  • A registered UK limited company?
  • Are you tackling technical challenges which are stretching the expertise of your staff and current industry knowledge?
  • Paying to overcome technical challenges, either through your employed staff or by using subcontracted workers?

If you can answer yes, even if your attempts to find a solution have been unsuccessful, you could qualify for R&D tax credits.

We've helped a wide variety of clients from various sectors recognise the value of R&D tax credits, so whether we are your accountants or not – feel free to give us a call to discuss.