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There are currently two schemes under which companies can claim R&D relief – the first is the SME scheme, used by small and medium sized enterprises (SMEs), and the second is the RDEC scheme mostly used by larger companies. Changes are being made to both schemes, making the RDEC scheme more generous, and the SME scheme less so. The government’s stated policy aim is to eventually align these two schemes to simplify matters – though whether this will ever actually happen is anyone’s guess.
There are also significant changes which will impact on all claims for accounting periods beginning on or after 1 April 2023.
Historically, the SME scheme has been almost lavish by international standards. Jeremy Hunt has stated that he is concerned it is not working as it should be to encourage R&D – although perhaps he just concerned that it is too expensive. Either way, changes to the R&D regime announced in the Autumn Statement last year are expected to save the Exchequer £215m in 2023/24, rising to £1,340m in 2027/28.
How will they save this money? Well, for expenditure until 1 April 2023, a loss-making company can claim a tax credit worth up to 33.35p per £1 spent on qualifying R&D – but from 1 April 2023, this tax credit will reduce to 18.6p per £1 spent on qualifying R&D – a reduction of approximately 44%. Doom and gloom aside, although reduced, the tax credit is still very much worth having if you can get it.
The reduction will be achieved by reducing the additional deduction rate (the element that reduces a company’s taxable profit or increases its loss) from 130% of certain expenditure to 86% of that expenditure, as well as reducing the credit rate for surrenderable losses (the losses a company can surrender for cash from HMRC) from 14.5% to 10%. The mechanics of this mean that loss making companies will take the biggest hit – those early-stage companies who could really do with the cashflow benefit. Whilst a loss-making company will experience a reduction to their tax credit of 44%, the reduction in the benefit of SME R&D relief for a profitable company will be a less significant 13%.
The R&D Expenditure Credit (“RDEC”) scheme is used by companies over a certain size, in addition to SMEs undertaking grant funded R&D, or R&D subcontracted to them. And there is better news for these companies, as the RDEC will be increased from 13% to 20% of qualifying R&D for expenditure from 1 April 2023.
The RDEC itself is a taxable credit, so the real increase isn’t quite as substantial as it sounds – the effective increase in the credit is from 10.5p per £1 of qualifying R&D spend to 15p per £1 of qualifying R&D spend. The RDEC scheme remains less generous than the SME scheme, but the gap has narrowed considerably.
The other big change is a significant restriction on R&D relief for some overseas expenditure. This has been mooted for some time – the UK is currently more generous than international norms, offering R&D relief for expenditure regardless of where work takes place. The government, awkwardly if somewhat understandably, wants R&D activity to take place in the UK, not overseas, and is changing the R&D tax regime to encourage this.
For accounting periods beginning on or after 1 April 2023, relief will only be available, with limited exemptions, for subcontracted R&D and contributions to independent research where these activities take place in the UK, and for payments to externally provided workers where these workers are paid through a UK payroll.
When the measures were originally announced, there were no exemptions. Strong representations were made to the government, setting out the damaging impact of these changes, and they (partially) listened, introducing some welcome exemptions, summarised in the table below.
|Exempt from new rules||Not exempt from new rules|
|Geographical, environmental, or social conditions not present in UK, where it would be wholly unreasonable to replicate these in the UK.||R&D is cheaper overseas|
|Legal or regulatory requirements as a result of which the research and development may not be undertaken in the United Kingdom||R&D workers are only available overseas|
We welcome these exemptions, as we know how common it is for companies to make use of overseas subcontractors and externally provided workers – these exemptions are designed to shield companies from the restriction where it is necessary for them to do so.
Where, for example a company needs to undertake clinical trials overseas for regulatory reasons, or due to the location of a particular patient population, R&D relief can still be available.
Where R&D takes place for overseas for cost or staffing reasons however, R&D relief will be lost.
It is not all bad news. After sustained pressure, R&D relief will be introduced for data and cloud computing costs, for accounting periods beginning on or after 1 April 2023.
R&D relief is generally only available where a company is a going concern. This has been a problem for viable businesses, where a company’s trade and R&D is transferred to another group company (and so the original company is no longer a going concern). Currently, no R&D relief is available for the original company – but for periods beginning on or after 1 April 2023, it will be.
A whole raft of administrative changes have been announced.
The most significant of these is the requirement to notify HMRC that an R&D claim will be made. The notification deadline will be 6 months after the end of a company’s accounting period – significantly in advance of normal R&D claim time limits (where a company generally has two years to make a claim). This notification requirement will apply to companies making their first R&D claim where their accounting period begins on or after 1 April 2023, and companies that have not made an R&D claim in the preceding three years. Where a company is required to notify, but has not, R&D relief will be lost.
HMRC will also have increased powers to specify the form of and content of R&D claims.
Innovative companies need to take the time to understand the changes that are coming. There are some things that can be done, like bringing forward or delaying expenditure, or changing a company year end, but in the long term, the whole landscape of R&D relief is changing – and there are important strategic decisions to be made surrounding each R&D function.
If you would like further information on the changes to R&D tax credits, please get in touch with our team.
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