Important changes to the R&D Scheme - April 2023

Jeremy Hunt has set out some key changes to the R&D tax credit scheme which come into effect on 1 April 2023. These changes have been brought in to improve the competitiveness of the RDEC scheme and are also a step towards a proposed more simplified, single RDEC-like scheme for all claims. They also target fraudulent and abusive claims which have been increasing in recent years.

The key changes are as follows:

• SME Scheme
  The additional deduction will decrease from 130% to 86%, and the repayable credit rate for loss making companies will decrease from 14.5% to 10%.
• RDEC Scheme
  The Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%. The credit under the RDEC scheme is taxable and so the increase in the RDEC % will more than offset the effect of the increase in the corporation tax rate to 25% from 1 April 2023.

What does this mean for you?

For the majority of early-stage start-ups, expenditure will outweigh income as the company looks to develop and commercialise their product or service offering. For the below examples, we have assumed that the company is loss making with tax losses greater than their R&D qualifying spend.

Under the SME scheme, the benefit of the scheme has reduced from 33p for every qualifying £ of R&D spend to 18.6p. this means a significant reduction in cashflow expectations and may impact forecasting and planning around the company’s next investment round. A simple illustration has been provided below:

Whilst your company may be an SME, a claim may need to be made under the large company scheme (RDEC). This is often due to the company receiving grant funding for a project. These rules are complex and advice should be sought when filing an R&D claim. The below illustration assumes an intervention rate for a grant of 70%.

* This assumes the notional tax applied to the RDEC scheme will be 25% from 1 April 2023. We do not have sight of the legislation to confirm this treatment.

Other changes

The above changes are in addition to a number of other changes announced earlier this year which will come into effect from 1 April 2023.

Qualifying costs

The scope of qualifying expenditure is extended to include:

• the costs of licences to access and use a collection of data, and
• costs of cloud computing services including provision of access to, and maintenance of remote data storage, operating systems, software platform and hardware facilities.

These changes will particularly be welcomed by the technology sector and by those companies with R&D projects which incur significant costs associated with cloud computing and hosting.

The definition of R&D will be extended to include R&D projects that are seeking advances in pure mathematics.

Overseas subcontractors and Externally Provided Workers

The Government also seek to focus the benefit of the scheme on work undertaken in the UK. Therefore, it has announced restrictions on claims for expenditure on overseas subcontractors, Externally Provided Workers, and contributions to independent research bodies. To qualify, such costs must be incurred in the UK or meet conditions for "qualifying overseas expenditure".

"Qualifying overseas expenditure" is restricted to costs incurred where the conditions necessary for the research are not present in the UK, such as geography, environment, or social conditions (for example deep ocean research) or where there are regulatory or other legal requirements for certain activities to take place in specific territories (such as clinical trials). The conditions will not include cost, or availability of workforce.

Companies will want to consider the impact of these restrictions on future R&D claims particularly when deciding whether to engage with overseas subcontractors and externally provided workers to undertake qualifying R&D activities.

Format of claims

In future all R&D claims will have to be made digitally through the HMRC portal and be endorsed by a named senior officer of the company. Claims will also need to include details of any agent who has advised the company on compiling the claim.

Advance notification of claims

HMRC will require companies wishing to make an R&D claim to notify HMRC in advance, within 6 months of the end of the accounting period. Companies that have made an R&D claim in one of the preceding three accounting periods will not need to pre-notify HMRC.

How we can help

Corrigan have a great deal of experience of advising our clients on the R&D reliefs which may be available to them and assisting them with the preparation of their claims. We have submitted claims for clients from a few thousand pound repayable credits to claims in excess of £1 million.

Should you wish to discuss these changes or whether the company is eligible for an R&D claim, please contact Pete Edwards or Ben Simmons.