For all companies making an R&D claim there is welcome news regarding the expansion of the type of activities that qualify and cost categories eligible to be accounted for, notably:
- the definition of R&D for tax relief will be expanded to include mathematics – clarifying in particular that ‘pure maths’ can qualify, and;
- the creation of two new categories of qualifying expenditure for R&D tax relief, on data licences and cloud computing services, which will be particularly relevant to those high tech companies.
Tackling abuse and improving compliance
We have seen a significant increase in the number of enquiries and compliance checks opened by HMRC. These can unfortunately be a very time consuming and costly process as even if your claim is 100% accurate and valid (if not well substantiated), your enquiry could last several weeks and delay your cash, credit or tax relief by up to six months.
Looking forward in order to mitigate the over aggressive claims made and advice given by rogue advisors, HMRC has introduced legislation whereby all claims for R&D reliefs (either for a deduction or a tax credit) will in future have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online) and be accompanied by a compulsory additional information form which will have to:
- break the costs down across qualifying categories and provide a description of the R&D
- make sure each claim will need to be endorsed by a named senior officer of the company
- have additional information and claim notification forms will need to include details of any agent who has advised the company on compiling the claim
- be submitted for all claims made on or after 1 August 2023 (regardless of the accounting period start date)
Small and medium sized enterprises
For expenditure incurred on or after 1 April 2023 SMEs will see a reduction in the level of R&D incentive they will receive, depending on whether they are considered an R&D intensive company or just a standard SME:
- the payable credit rate will be 14.5% instead of the 10% credit rate which it is for non R&D intensive companies
- the additional deduction rate will reduce to 86% (from 130%) on top of the normal 100% tax deduction for qualifying R&D expenditure
The government will legislate in the Finance Bill 2023-24 to provide additional R&D tax relief (to take effect from 1 April 2023 once the legislation comes into force), for eligible R&D intensive SMEs. A new credit rate will be available to loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure.
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.
This definition will calculate R&D intensity as the ratio of the company’s qualifying R&D expenditure (for both the SME and RDEC schemes) for a period to its total expenditure for the same period.
It is good news for technology companies that are considered large for R&D purposes as part of these reforms see for expenditure incurred from 1 April 2023 the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.
Future planning the merging of the RDEC and SME schemes and overseas expenditure
The government’s consultation on merging the RDEC and SME schemes closed on 13 March 2023. The government is currently considering the responses and no decision has been made whereby the intention is to keep open the option of implementing a merged scheme from April 2024.
The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief which has been consulted on recently.
The next step
If you have any further questions regarding this insight, please contact Mathew Browne.