What could a changing R&D landscape mean for you?
What changes are happening to the R&D Tax Credits Scheme?
From 1st April 2023, both SMEs and large organisations (aka RDEC) will be subject to R&D Tax Credit changes.
In short, the rates will be rebalanced so that businesses claiming under the RDEC will benefit from more generous rates.
The UK Government has said the R&D Tax Credits schemes are being reformed “to ensure public money is spent effectively and best supports innovation”. What this means is that the reforms are intended to increase and encourage R&D activity, which should lead to private investment and a boost in economic growth.
Figures published by HMRC show both schemes promote additional R&D expenditure and recent studies from the Treasury show that for every £1 of support, the RDEC scheme incentivised £2.40 – £2.70 of additional private R&D expenditure, and the SME scheme incentivised an additional £0.60 – £1.28.
Whilst the rebalancing of rates might, at first glance, appear like a blow to UK SMEs, the scheme continues to provide a very worthwhile and significant tax credit or cash incentive for companies undertaking research and development within their organisation.
From April 2023, a loss-making SME which spends more than 40% of overall costs on R&D will benefit to the tune of 27% – £27 for every £100 spent on R&D. These companies will be able to claim a 14.5% tax credit.
A profit-making SME will receive between 16% and 22%, depending on the scenario. A large organisation claiming through the RDEC scheme can expect to claim back circa 20% from April 2023.
Are there any other changes being implemented?
The rebalancing of rates outlined above is not the only change coming into force in April 2023. The Government has announced several changes. Firstly, Cloud computing and data acquisitions costs (where they directly relate to R&D activity) have extended the scope of qualifying expenditure. Such costs are common in certain industries such as within technology, media and telecommunications companies. You can read a bit more about this here.
The definition of R&D for tax reliefs will be expanded to include all mathematics, clarifying in particular that ‘pure maths’ can qualify.
First time claimants (or those who have not claimed during the past three accounting periods) will also need to pre-notify HMRC if they intend to make a claim. The notification must be made within six months after the year end of which they intend to claim. Also, all future claims must be submitted digitally, and if the claimant is using an agent, such as randd, then this must be disclosed during the pre-notification. Although, here at randd we have always disclosed our involvement to HMRC.
Companies making claims after August 1 2023 must provide a digital additional information form, supporting HMRC’s compliance work.
There will, however, be a delay to the introduction of restrictions to some overseas expenditure, which has been pushed back a year to April 1st 2024. From that date, the Government will limit costs incurred overseas, so payments to overseas sub-contractors will no longer be eligible (except in very specific circumstances). It is therefore worthwhile for claimants to look again at costs that are incurred overseas and determine if these can be refocused and undertaken within the UK.
What does the future hold for R&D Tax Credits?
The Treasury’s aim is to simplify the R&D Tax Credits scheme whilst ensuring those companies that invest heavily continue to be incentivised. The Government remains strongly committed to supporting R&D-intensive SMEs and the tax relief provides essential support. In fact, the Government have outlined their intention to increase public funding of R&D and has targeted raising UK investment in R&D to reach 2.4% of UK GDP by 2027.
Merging the SME and RDEC schemes remains a potential option from 2024 following the closure of the Government’s consultation in March 2023. Any decision on this was likely to be made in the 2023 Autumn Statement.
In summary, the overall scope of qualifying costs has been extended as the Government has reaffirmed its commitment to supporting UK-based R&D activities, and the rates can provide a significant tax reduction or cash incentive. Therefore, it may be an ideal time for certain companies to consider where their R&D activities are carried out, and if this is overseas then refocusing them within the UK could prove beneficial.
Due to these legislative changes, we believe it is now more essential than ever to work with a reputable and experienced R&D tax credits consultant. We can work alongside you to unearth genuine qualifying expenditure that is often overlooked by self-claimants or by using accountants and maximise your claim to its fullest extent.
These changes mean timing is key as claims made before April 1st 2023 will benefit from the traditional higher rates. It is also imperative to pre-notify HMRC of your intended claim. This is where a reputable and established agent, like randd, can help to ensure due process is followed.
