HMRC launched a review of R&D tax reliefs in 2021, looking at how effective the schemes were, and if they’re an efficient use of government spending. The resultant report was published in November 2021 and set out their initial findings and proposals.
Over the next few months, HMRC consulted with Stakeholders, and then in the Chancellor’s 2022 Spring Statement, they released further details of the proposals.
Then, in the summer, the Government published their draft of the changes to the legislation, which we’ll discuss here. The draft legislation is now in the process of going through the House of Commons and House of Lords, prior to getting Royal Assent later in the year.
The draft guidance to go along with the new changes was published in January 2023. Read our response to this and other relevant consultations.
Further changes announced in the Autumn 2022 and Spring 2023
In his Autumn statement, the Chancellor changed the rates of R&D tax relief from 1 April 2023. These were included in the Finance Act 2023, which received Royal Assent in January 2023.
In his Spring budget, delivered in March 2023, some delays were announced to previous changes. In addition, the Chancellor announced a preferential rate for ‘R&D intensive’ SMEs.
We’ve added all of these additional changes to the list below
Updates to R&D tax relief legislation from April 2023
Unless otherwise stated, all of these changes apply to claims for periods beginning on or after 1 April 2023.
Change 1: Data and cloud computing costs to be added to allowable expenses
Why? For many companies, data and its processing, computation and analysis have now become an integral part of their R&D. HMRC want to keep abreast of this technological change by allowing companies to claim for the costs of acquiring datasets and for the cloud computing costs associated with storing, processing and analysing data.
Change 2: Advances in pure maths will become eligible
Why? Previously, advances within pure maths weren’t counted as R&D for tax purposes. To many, this seemed odd, as maths is a fundamental part of science. Responding to feedback during its R&D consultations, HMRC is to change the legislation to allow claims to be made for advances in pure maths.
Change 3: Pre-notification will be required for claims
The new legislation will require certain companies to pre-notify HMRC of their intent to claim within 6 months from the end of their accounting period.
Why? We suspect that this is to make it easier for HMRC to assess the validity of claims and to reduce the number of historical claims being submitted. By restricting claims to only the most recent claim periods, claimants’ memories of the work will be fresher and the evidence more accessible than it would be for expenditure that’s up to three years old.
Change 4: Claims can be switched to RDEC if they were incorrectly submitted under the SME scheme
Why? This helps companies who claim under the SME scheme by mistake. There are some circumstances – such as where an SME’s R&D is subsidised, receives a State Aid, or the SME is subcontracted to perform R&D by a Large Company – where the claim should be made through RDEC. This change means companies will be able to convert their claim from SME to RDEC instead of losing it, even after the window for changes has passed.
Change 5: Time limits for R&D claims
Companies now need to make their R&D tax relief claims within two years of the end of the claim period. An exception is if the accounting period of the claim is longer than 18 months, in which case the time limit is 42 months from when it starts.
Change 6: Updated rate of relief
Note: This change applies to all expenditure incurred on or after 1 April 2023. This means if your claim period spans this date, you will need to separate the expenditure, to apply the correct rate of relief to each part.
In the Autumn Statement, the Chancellor significantly reduced the rates for SMEs claiming R&D tax relief. This was a real shock, as rates have only ever gone up in the past. At the time it seemed like a kneejerk reaction, although the Government claim it’s part of their longer-term plans to combine the SME and RDEC schemes into a single scheme for all businesses. The enhanced deduction for SMEs was reduced from 130% to 86%, and the amount of tax credit was reduced from 14.5% down to 10%. Meanwhile, businesses claiming under the RDEC scheme saw their tax credit rate increase from 13% to 20%. These changes all apply for expenditure incurred on or after 1 April 2023.
Because of the way the relief is calculated under each scheme, these changes mean the schemes now provide a more similar rate of relief.
Other changes
There are several other minor changes that are intended to address inconsistencies in previous versions. Most of these will only impact a small number of cases. If you want to get right into the details, you can review the full text of the legislation.
Later changes
Change 7: Tax relief will only be available for subcontracted R&D & EPWS in the UK
Note: This change has been pushed back until 1 April 2024, to allow the Government to consider how it relates to their proposals for a combined R&D tax relief scheme.
Where subcontractors or Externally Provided Workers (EPWs) are used as part of an R&D project, the new legislation is going to restrict a company’s qualifying costs to those incurred for work undertaken in the UK. (There will, however, be a few specific exceptions to this to account for cases where companies are not able to use a UK-based subcontractor.)
Why? The Government wants to incentivise companies to find R&D partners based in the UK, reducing the amount of money they spend elsewhere and increasing the knock-on benefits that they believe come with increased R&D activity.
Change 8: More information will need to be submitted with the claim
Note: This change has been pushed back to 1 August 2023. It will apply to all claims submitted on or after this date.
In an effort to tackle non-compliance, companies will be required to submit
- a description of the R&D
- a breakdown of costs across qualifying categories
- the name of any agent or advisor who has helped to prepare the claim
- sign off from a named senior officer of the company.
Why? Some companies are already submitting detailed information with their claims, but not all. This has made it hard for HMRC to assess the validity of some claims, and there is much anecdotal evidence to suggest that many companies and advisors have been abusing the system by submitting claims for work that clearly doesn’t qualify.
HMRC’s new measures aim to reduce these spurious claims by increasing transparency and accountability. The changes will also make it easier for their compliance checkers to review and decide the validity of a claim.
We think these changes will have the biggest impact on standards in the R&D industry since the scheme was first introduced in 2000. Hopefully we’ll start to see R&D cowboys held to the same standard as many ethical advisors are already working to, creating a more level playing field between providers.
Related article: Get prepared for the Additional Information Forms for R&D tax relief
Change 9: Claims will need to be made digitally – unless the company is exempt from MTD
Note: This change has been pushed back to 1 August 2023. It will apply to all claims submitted on or after this date.
Why? The switch to digital claims is in line with the Making Tax Digital transition across most of HMRC’s services. Because HMRC are asking for more information in connection with each claim, managing this all digitally should be easier and cheaper than handling paper submissions.
Change 10: Preferential rates for “R&D intensive” SMEs
Note: This applies to expenditure incurred on or after 1 April 2023. However, the legislation to introduce the change has not yet been drafted.
Loss-making “R&D-intensive” SMEs will be able to claim for a more generous payable cash credit. This equates to £27 per £100 spent on R&D, rather than just under £19 for other companies. “R&D intensive” SMEs will be deemed to be those that spend at least 40% of their total expenditure on R&D.
This will apply to expenditure incurred on or after 1 April 2023. However, the legislation to implement the change has not yet been drafted or passed. HMRC have committed to releasing the draft legislation for consultation in the summer of 2023.
Companies who want to take advantage of the new rate can either
- delay their submission until the legislation is in place, or
- submit right away under the lower rate, and then amend their submission after the legislation is in place.
Change 11: A combined R&D tax relief scheme
Two days before the Spring Budget, HMRC closed its consultation on combining the two current R&D schemes – the SME scheme, and the RDEC scheme for large businesses. You can read our response on behalf of The R&D Community members.
In their papers for the Spring Statement, the Government said ‘no decision has yet been made.’ However, they also declared their intention to release draft legislation for consultation over the summer this year, so it seems like they are pretty sure of their plans!
We will, of course, keep you up to date when that consultation is available for comment.
Final thoughts
We’re really pleased to see HMRC introducing changes to improve compliance and extend the scope of the scheme. Asking businesses to submit more information with their claims should improve standards, and hopefully the move to digital submissions will result in faster turnarounds.
But there are some other changes which seem to benefit HMRC at the expense of small businesses. The reduction in rates of relief will mean many SMEs will suffer, as their already tight budgets are squeezed even further. With the overall claim value reduced, many of these SMEs will struggle to find a responsible advisor who’s willing to help at a reasonable fee.
And the looming restrictions on overseas subcontractors and workers mean that some businesses will struggle to find or afford the specialist services they need to successfully conduct their research. We still believe that price and availability are valid reasons for choosing suppliers outside the UK, and that there’s a risk this change will harm small businesses and stunt innovation.
Where to get more information
We send regular email updates to our community with news on legislation and guidance changes, as they occur, and lots of free resources and advice on preparing claims. If you want to be kept in the loop, you can sign up for our free email newsletter, and we’ll be in touch!
