Tax reliefs on R&D have been subject to several changes in recent months and some of these changes are highly complex adding to an already complex scheme.

HMRC launched a review of R&D tax reliefs in 2021 to evaluate the effectiveness and efficiency of the schemes. The resultant report was published in November 2021, and HMRC consulted with stakeholders before releasing further details of their proposals in the Chancellor’s 2022 Spring Statement. The draft legislation was published in the summer, which is now in the process of going through the House of Commons and House of Lords, prior to receiving Royal Assent later in the year. The Autumn 2022 statement made further changes to R&D tax relief rates from 1 April 2023, and the Spring 2023 budget announced delays to some previous changes, as well as a preferential rate for “R&D intensive” SMEs.

From 1 April 2023, the following changes will apply to R&D tax relief legislation:

1. Data and cloud computing costs can be claimed as allowable expenses to keep up with technological change.
2. Advances in pure maths will become eligible as R&D for tax purposes.
3. The rate of relief has been updated, and SMEs will now have reduced rates, while businesses claiming under the RDEC scheme will have an increased rate. In the Autumn Statement, the Chancellor significantly reduced the rates for SMEs claiming R&D tax relief. This was a real shock, as rates have only ever gone up in the past. At the time, it seemed like a kneejerk reaction, although the Government claims it’s part of their longer-term plans to combine the SME and RDEC schemes into a single scheme for all businesses. The enhanced deduction for SMEs has been reduced from 130% to 86%, and the amount of tax credit has been reduced from 14.5% to 10%. Meanwhile, businesses claiming under the RDEC scheme will see their tax credit rate increase from 13% to 20%. These changes all apply for expenditure incurred on or after 1 April 2023. Because of the way the relief is calculated under each scheme, these changes mean the schemes now provide a more similar rate of relief.
4. Loss-making “R&D-intensive” SMEs will be able to claim for a more generous payable cash credit. This equates to £27 per £100 spent on R&D, rather than just under £18.60 for other companies. “R&D intensive” SMEs will be deemed to be those that spend at least 40% of their total expenditure on R&D. However, the legislation to implement this change has not yet been drafted or passed. HMRC has committed to releasing the draft legislation for consultation in the summer of 2023. Companies that want to take advantage of the new rate can either delay their submission until the legislation is in place or submit right away under the lower rate and then amend their submission after the legislation is in place.
5. Claims can be switched to RDEC if they were incorrectly submitted under the SME scheme.
6. Time limits for R&D claims are two years from the end of the claim period or 42 months from when it starts for accounting periods longer than 18 months.
7. Pre-notification will be required for certain claims to assess their validity and reduce the number of historical claims being submitted. This applies in respect of accounting periods commencing after 1 April 2023 and will affect first time claimants, where the last claim was made more than 3 years before the expiry of the claim notification period or where the previous year’s claim was not submitted until after the expiry of the claim notification period.

Other changes include tax relief only being available for subcontracted R&D & EPWS in the UK from 1 April 2024 and the submission of more information with the claim. Companies will also need to make digital claims from 1 August 2023.

Overall, the changes to R&D tax relief legislation aim to improve compliance and reduce the number of spurious claims.

The restrictions on overseas subcontractors and workers mean that some businesses will struggle to find or afford the specialist services they need to successfully conduct their research.

It is important for companies to stay up to date with the changes and seek advice from qualified professionals to ensure they are claiming the correct amount