R&D tax credit – regime changes

New proposals to reform the UK’s research and development (R&D) tax credit regime will allow more costs to qualify for the valuable tax relief but will also target perceived abuse of the system. Once enacted, the proposals will take effect for accounting periods commencing on or after 1 April 2023. Click here for full details on the reform.  A few of these measures have been outlined below.

HM Revenue & Customs (HMRC) is looking to bring the R&D regime up-to-date, specifically by updating the costs that qualify for the regime to reflect that companies are undertaking more innovation in technology and software. In particular, companies are increasingly incurring costs on data and cloud computing, and so from 1 April 2023 it will be possible to include these costs in R&D claims. However, the changes are also looking to refocus the relief towards innovation in the UK, so costs incurred on overseas workers or subcontractors from 1 April 2023 should no longer be included within claims, unless they fall within a narrow exemption. The new proposals are not trouble free.  There are issues that need to be considered and clarified, particularly for international structures carrying out R&D.  For example, the treatment of foreign branches of a UK company that undertaken qualifying R&D..  We are hoping to understand more in due course.

The other significant proposed change is aimed at targeting perceived abuse of the R&D tax credit regime and improving compliance. In order to achieve this, HMRC is introducing a requirement that new entrants, and those companies who have not made a claim for three years, will have to inform HMRC within six months of the end of the period to which the claim relates, that they intend to make a claim.

If this notification time limit is missed, then the opportunity to make a claim will be lost, even if this is within the two-year time limit. Without serious thought, this new rule could preclude a number of potential new claimants from making a qualifying claim and they may miss out on valuable tax relief. It will therefore be important to review projects on an ongoing basis to understand if they could qualify for R&D and make a timely notification to HMRC.

For those companies already in the regime, a refresh of how qualifying R&D is identified and the methodology used to track qualifying costs and calculate ongoing claims will be useful over the coming months. At the very least, it should help in understanding the impact of the proposed changes on the quantum of a company’s claim and/or maximise the benefit of a claim under the new rules.

A reminder of the existing rules, up to 31 March 2023 can be found in our factsheet, but broadly the benefit of a R&D claim under the SME regime could be tax relief of up to 130% of qualifying expenditure, and a cash repayment for certain companies (applying a credit rate of 14.5%).

SME relief from 1 April 2023 will however be reduced to 86% of qualifying expenditure, with an SME credit rate being reduced to 10%.  Accordingly, even with the headline corporation tax rate increase to 25%, the overall benefit of the SME R&D regime will reduce.   .

It’s worth noting that for companies that cannot claim R&D relief under the SME regime, relief may be available under the alternate regime, known as the Research and Development Expenditure Credit (RDEC).

With the more favourable impact that the RDEC regime has had on the UK’s productivity when compared to that of the SME regime, the government has announced that the RDEC credit on qualifying expenditure from 1 April 2023 will be increased from 13% to 20%.

In addition to the raft of R&D tax credit changes introduced from 1 April 2023, the government published a tax consultation document in January to seek views on the design of a single, simplified R&D tax credit scheme. Read our response to this consultation.

The R&D tax credit landscape therefore continues to be scrutinised and evolve, so watch this space!

If you would like to discuss these changes or R&D tax credits more generally, please get in touch with your usual Saffery contact, or speak to Justine Stalker.