R&D - Even more changes afoot

Changes to the R&D tax relief schemes were announced in the Autumn Statement 2022 with some of the changes having been discussed since the Autumn Budget 2021. The Spring Budget 2023 brought yet even more changes.

As previously announced in Autumn 2022, the following changes were confirmed which will apply in respect of expenditure from 1 April 2023:

• 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%.

  Under the current rules (to 31 March 2023), companies spending £100 on R&D can obtain a repayable credit of £33.35. Under the new rules this reduces to £18.60.

• 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.

• 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.

In addition to the above, further changes were announced as follows:

• New Credit Rate for 'R&D Intensive' loss making companies

  A new credit rate will be available to loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% credit rate for companies claiming support under the existing R&D SME scheme.

  Under the new rules, companies heavily involved in R&D spending £100 on R&D will receive a repayable credit of £26.97 less than the current £33.35 (to 31 March 2023) but more than the £18.60 available under the SME scheme from 1 April 2023.

  The changes will take effect from 1 April 2023, however because this change will be legislated in a future Finance Bill companies will only be able to claim relief at a later date, once legislation is in place. Companies making their claim for SME relief in the meantime will therefore claim any payable credit at the new 10% rate applying from 1 April 2023, but R&D intensive SMEs wishing to claim the additional support will be able to claim the higher R&D intensive rate by either delaying submission of their claim until the legislation is in place, or by amending their claim once the legislation is in place.

  The government has published a technical note setting out how this measure works in greater detail. Draft legislation will be published for technical consultation in summer 2023:

  Policy paper: Technical note: Additional tax relief for Research and Development intensive small and medium enterprise

• Deferral of restricted expenditure on overseas subcontractors and Externally Provided Workers

  The previously announced restriction on the inclusion of certain overseas expenditure will be deferred a year until 1 April 2024.

• A single scheme for 2024?

  In addition to the changes announced in the Spring Budget 2023, the government reconfirmed its commitment to review how the R&D reliefs are operating and where they can be improved.

  The government is considering responses to the recent consultation on merging the RDEC and SME schemes and intends to keep open the option of implementing a merged scheme from 1 April 2024. The government will publish draft legislation on a merged scheme for technical consultation in summer 2023.