On 1 April, some changes to UK R&D Tax Reliefs came into place, a number of which were announced in the 2023 Spring Budget. The aim? To increase innovation, extend the scope of qualifying expenditure for R&D claims, and just as importantly, tackle fraudulent claims.
We’ve asked Tom Whitworth, R&D Incentives Director, for his thoughts on the changes.
Take it away Tom…
In November 2022, news from the Autumn Budget came as a surprise for many innovative businesses, with the announcement of a decrease in rates for small to medium sized enterprises (SME), R&D Tax Reliefs regime. But then fast forward to 15 March 2023 Spring Budget, which sought to address the impact of these reductions for some, more R&D intensive businesses welcome re-boost of the relief for the most innovative businesses.
What is R&D?
But first, let’s go back to the basics. In order to meet the definition of R&D as set out by HMRC, and be able to claim Corporation Tax relief in this area, an R&D claim must have present project(s) which advance science or technology.
To claim the reliefs, you’ll need to outline how your R&D project(s) have:
- Sought an overall advance or appreciable improvement in science or technology and;
- Worked to overcome scientific or technological uncertainties
This can be for the development of new or improved products, processes or software.
It’s also important to know what costs can and can’t be included in an R&D Tax Reliefs claim. It’s vital to correctly identify and quantify all the qualifying costs relating to your R&D work to ensure that your claim is successful, and that you claim all the relief that is available to you.
The following categories of expenditure can be claimed:
- Staffing costs – which can include employer NIC payments and employer pension contributions
- Subcontractors -with certain exceptions for the Research and Development Expenditure Credit (RDEC) Scheme and Externally Provided Workers
- Utilities – including power, water and fuels that were used directly in the R&D process
- Cloud computing (such as data storage) and data licensing costs
Rates that have changed
1 April 2023 marked changes to the rates for both SME and RDEC regimes. The decrease of SME relief from around 25% of every £1 of qualifying R&D expenditure to 21.75% for profitable businesses also was implemented.
For loss-making SMEs, they will be entitled to up to 18.6% for every £1 of qualifying R&D expenditure (down from up to 33%).
However, loss-making R&D intensive SMEs (that spend more than 40% of their total company expenditure on qualifying R&D expenditure), will be entitled to relief of up to 27% for every £1 of qualifying R&D expenditure.
Meanwhile, the RDEC rate will increase from 13% to 20% (or net 15%) per £1 of qualifying R&D expenditure.
Whilst R&D intensive businesses will see more benefits with the adjusted rates, others will still see an improvement. Both SME and RDEC reliefs look likely to represent a sizeable incentive for innovative companies, continuing to provide additional financial support for their development work and comprising a key pillar of the governments total spending on R&D.
What’s new for R&D qualifying expenditure?
Further changes to R&D Tax Reliefs hope to support more modern methods of R&D and related expenditure. Whilst consumables and software were already included in the previous definition of qualifying expenditure, this has been extended to include cloud computing, storage and hosting, and datasets. The definition of R&D has also been updated to include pure mathematics in the hope that it’ll grow sectors such as quantum computing, artificial intelligence, and robotics.
R&D goes digital
From 1 August 2023, R&D Tax Relief claims will have to be made digitally via an ‘additional information’ form. This digital submission will have to include:
- A technical description of what R&D activity the company has undertaken
- A breakdown of qualifying R&D expenditure, per project
- Endorsement of the claim from a ‘senior officer’ within the business
- Details of any agent that may have advised the company in making a claim
It’s important to consider…
Our R&D Incentives team strongly recommend that businesses which are not already providing a technical description of their R&D activity to substantiate their R&D claims, do so now. This can help mitigate the risk of a HMRC enquiry into your claim, but also pave the way for the upcoming legal requirement to provide this information from 1 August 2023.
Whilst the rates for R&D Tax Reliefs have changed and will impact businesses in a variety of ways, they remain a great relief for innovative businesses! The administration of submitting claims is also changing, ultimately, we believe this will improve the quality of claims going forward.
We are here to help
If the changes that have been outlined have made you wonder if you are eligible for R&D Tax Reliefs, or you are just looking to get some initial advice, please give our R&D Incentives team a call on 0114 698 6960.
We’d love to talk through how we can deliver great things, together.