Research & Development (R&D) relief was introduced with the aim of incentivising companies to invest in innovation. Currently, there are two schemes; Research & Development Expenditure Credit (“RDEC”) for large corporations and the Small and Medium Enterprises (“SME”) scheme.
Each scheme has different rates and rules which will apply. Although the RDEC claims are larger in value the cumulative SME claims cost the Government £7.7bn in 2021/22. A rapid increase in the number of submitted SME claims have resulted in a reform of the regime. From 1 April 2023 new rules will be in place which aim to align the two schemes.
SME’s can claim an additional 130% deduction of qualifying expenditure, totalling 230% deduction. Every £1 spent on qualifying R&D tax relief of 43.7p is received (£1 x 230% x 19%). In some circumstances a tax credit can be claimed, the rate is 14.5% which is lower than the corporation tax rate at 19% (due to increase to 25% in April 2023).
Since 1 April 2021, the SME credit is capped in certain circumstances, known as the “PAYE and NIC cap”. The cap is £200,000 + 300% of a company’s expenditure for employees.
From 1 April 2023 the deduction percentage is decreasing from 130% to 86%, which means a total deduction rate of 186% (compared to 230%). The tax credit is also set to reduce from 14.5% to 10%. Plus, the existing PAYE and NIC cap which restricts the number of companies which can claim the relief.
This is a slightly different scheme, for every £1 of qualifying expenditure, 19p of tax relief is received and a tax credit is calculated as a percentage of qualifying expenditure, the current rate is 13%. From 1 April 2023 the deduction percentage is increasing from 13% to 20%.
Changes to both schemes
Further changes were announced in the Autumn Budget 2021, the changes below apply to claims made in respect of accounting periods beginning on or after 1 April 2023. If a company has a 31 December 2023 year end these rules will first apply for the accounting period beginning 1 January 2024.
- Expand categories of qualifying expenditure – Directly attributable data licencing and cloud computing costs will be eligible for enhanced relief. Historically, R&D relief was geared towards innovative projects associated with science and technological advancement. Pure mathematics is to be included as an eligible activity to promote enhancements in theoretical fields. Legislation is to be updated to ensure the new Health and Social Care Levy (takes effect from 6 April 2023) is included as an eligible cost component.
- Focus relief to UK expenditure – A fundamental change was to refocus the relief to activities performed in the UK, restricting employee and subcontracted costs incurred overseas, there are specific exemptions for when specific overseas activities will remain eligible for relief. However, legislation does make it clear that companies will not be able to claim that overseas costs fall into this exemption when the main reason is due to costs constraints, or the business does not have suitable workers in the UK.
- Due diligence and filing processes – Regulations are yet to be published but expect new requirements to include a breakdown of costs, overview of R&D projects, claims to be endorsed by a senior office of the company and details of any agents. A pre-claim intention statement will be required to inform HMRC of a businesses intention to file a claim within six months after the end of the period in which the claim relates. Notification is not required where a company has submitted a claim in the previous three accounting periods.
- Tighter controls – The Government is legislating to give greater powers to HMRC in order to collect overpaid R&D tax relief or credit payments. The powers will expand to self-assessment law, this means individuals could be personally liable for the company’s debts.
Tighter controls and restrictions will result in a number of companies becoming ineligible to make a claim from 1 April 2023. Ensure you use a reputable agent and thoroughly review your activities and costs to avoid falling foul of the new rules.
If you are unsure or require further advice on any of the above information, please get in touch.