What should you be aware of ahead of filing an R&D claim?

As of 8th August 2023 there have been significant changes to the research and development landscape, notably an additional administrative burden and various legislative changes (predominantly applying to expenditure incurred post 1 April 2023).

Most technology companies will be undertaking significant research and development (R&D) activities and are therefore entitled to a reduced tax liability or even a cash credit from HM Revenue & Customs (HMRC) under certain circumstances. The R&D regime has however undergone two significant overhauls; the first impacting expenditure incurred post 1 April 2023 and the second from 1 April 2024.

Post 1st April 2023

SME specific considerations and R&D intensive SMEs

Historically for expenditure incurred prior to 31 March 2023 SMEs are entitled to a payable credit (given a specific tax profile) of 33.35% (230% x 14.5%)

For expenditure incurred post to 1 April 2023 the payable credit decreases to 18.6% (186% x 10%).

SME R&D intensive companies (as outlined below) will be entitled to a payable tax credit of up to 26.97% (186% x 14.5%) of qualifying R&D expenditure from 1 April 2023. Eligible companies won’t be able to claim until the legislation receives Royal Ascent. Draft legislation indicates this additional benefit for intensive SMEs will be formally implemented from April 2024 but applied retrospectively to expenditure incurred post 1 April 2023. In certain circumstances this may require amended tax returns.

Research and Development Expenditure Credit (RDEC) for large companies

A gross tax credit of 20% is available for expenditure incurred post 1 April 2023, therefore with a corporation tax rate of 25% this provides for a 15% net benefit. 

Legislative changes for all claimants

In relation to expenditure post 1 April 2023:

• the definition of R&D for tax reliefs will be expanded to include all mathematics – clarifying in particular that ‘pure maths’ can qualify.
• two new categories of qualifying expenditure for R&D tax relief, on data licences and cloud computing services have been created. 

A data licence is a licence to access and use a collection of digital data Cloud computing includes:

• data storage
• hardware facilities
• operating systems
• software platforms

You can claim for most data and cloud computing costs spent on R&D.

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 “Additional Information Form” (AIF)

Prior to submitting an R&D claim within a tax return, all companies must now submit an AIF to HMRC. This on-line form must detail: 

• A sample of R&D projects from both a technical and financial aspect
• Who in the Company is responsible for the R&D claim
• Details of any agent who has advised on its preparation.
• The form cannot cover multiple years for the same project – a new form will be required each year
• Each individual legal entity must submit its own form and you cannot just simply say, 'see elsewhere' or cover multiple legal entities in one form 

Can be supplemented by additional R&D information (a report) attached to the corporation tax return (e.g., explaining cost sampling, claim methodologies used in compiling the claim, and details of the competent professionals).

Post 1st April 2024

The Autumn Statement 

The Chancellor announced on 22nd November 2023, at the Autumn statement, a merging of the two R&D schemes (a dual aspect SME scheme with differing outcomes depending on profit/loss status, and an RDEC scheme). From 1 April 2024 an expenditure credit style scheme is available with a 20% above the line credit. Therefore, for company’s paying corporation tax at 25% the net benefit will be 15%. Additional legislative changes have also been introduced in relation to expenditure incurred post 1 April 2024:

• Subsidised expenditure rules have been removed, so subsidised R&D activity is no longer strictly prohibited from being included within a claim. 
• Claimants will no longer be able to include third party bank details / nominate a third party as the recipient of any R&D relief. The relief must be paid directly to the claimant. 
• In an attempt to reduce non-compliance levels, HMRC are set to publish a compliance action plan.
• HMRC has updated the definition of subcontracted expenditure to make it clearer what the difference between ‘normal’ contracts and ‘contracted out R&D’ are. Prospective claimants undertaking qualifying R&D in the delivery of a contract remain able to claim relief, but the risk of a double count has been removed. 

R&D intensive loss making SMEs

From 1 April 2024, the rate at which loss-making companies are taxed within the merged scheme will be reduced from 25% to 19%, and the threshold for additional support for R&D intensive loss-making SMEs will be lowered from 40% to 30%. It has been suggested that this will allow for approximately 5,000 more companies to claim relief.

Added complexities

Whilst there is a “year of grace” introduction to the intensive loss making rules, aimed at saving businesses from switching between the standard regime and the intensive R&D regime, there is the potential for a claimant to file an R&D claim under a number of differing regimes. In the case where the accounting periods overlaps with the changes taking affect from 1 April (either 2023 or 2024), the claimant may be filing R&D claims under a number of differing regimes and eligible rules. It is therefore important to seek advice from an expert.

The next step