R&D Tax relief- changes from april 2023

• Siddharth Agarwal
• 11 Jul,2023
• Tax

R&D tax incentives have been encouraging businesses to innovate for many years and keep the UK at the forefront of technological progress. These schemes offer generous tax incentives to limited companies undertaking qualifying research and development projects. But R&D tax relief schemes have been under constant review by the government over the past few years, particularly to combat fraudulent claims.

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R&D Tax Relief - Changes from April 2023

R&D tax incentives have been encouraging businesses to innovate for many years and keep the UK at the forefront of technological progress. These schemes offer generous tax incentives to limited companies undertaking qualifying research and development projects. But R&D tax relief schemes have been under constant review by the government over the past few years, particularly to combat fraudulent claims.

Significant changes have been introduced from April 2023 as a measure to prevent errors and suspected unethical claims.

The key changes to the scheme have been discussed in the article below.

Changes In Tax Relief Rates

The rates at which R&D tax relief is available on expenditure incurred from 1 April 2023 have changed as follows.

The small and medium enterprise (SME) scheme has undergone the following rate changes.

• The R&D qualifying expenditure's upliftment or enhancement rate was cut from 130% to 86%. Consequently, the net benefit for successful businesses will drop to 21.5% from 24.7%.
• For businesses that are experiencing losses, the repayable credit rate has dropped from 14.5% to 10%. A loss-making corporation will now only receive a net benefit of 18.6% as opposed to the 33.4% that was previously available.
• In addition, the government has introduced new incentives for loss-making R&D intensive companies*. Under this qualifying company will continue to get 14.5% refundable credit, thus increasing their net profit to 26.97%.

*Loss Making R&D intensive firms are those whose proper R&D expenditure is at least 40% of total expenditure.

The (Research and Development Expenditure Credit) RDEC scheme is mostly employed by big businesses. The following rate adjustments apply to this plan:

• The 13% headline credit rate available on qualified R&D expenditure has been increased to 20%. As the credit is taxable at the normal corporation tax rate, the net profit after tax will be 15% (previously 10.5%).

Companies that do not have a March 31 year-end need to split the calculation between the two periods to apply the appropriate discount rate to qualifying expenses.

Change To The R&D Claim Process

There are two changes included in the current Finance Bill that will impact all R&D claims:

1. Before making an R&D claim, additional information will need to be provided.
2. Some companies are required to submit a claim notice within 6 months of the end of the accounting period in which they wish to claim R&D relief.

It is important to note that for any claim made on or after 1 August 2023, an additional information form must be submitted to HMRC before filing a CT600. Failure to submit this form will automatically remove all R&D relief from CT600.

The following details are required when submitting your R&D application for tax reduction or expenditure credit:

1. Unique Taxpayer Reference (UTR): Ensure that the UTR provided matches the UTR shown in your company's tax return. This is a unique identifier for your company's tax records.
2. Main Senior Internal R&D Contact: Give the phone number and email address of the important employee in your business who is in charge of the R&D claim. Normally, a firm director or someone in a senior position in charge of the R&D operations would be doing this.
3. Agent Contact Details: If you have engaged the services of an agent to assist with your R&D claim, provide their contact information. This could be an external tax advisor or specialist handling your claim.
4. Accounting Period Start and End Dates: Clearly state the start and end date of the accounting period for which you are claiming R&D. These dates should align with the information provided in your company's tax return.
5. Period of Account Start and End Dates: Specify the start and end date of the period for which the R&D claim is being claimed. This may not be the same accounting period, so ensure accuracy.
6. Summary of High-Level Planned Activities: Briefly summarize the planned activities related to the R&D project. This summary should demonstrate how the project aligns with the standard definition of R&D. For example, if you developed software, briefly explain its purpose or intent. Please note that proof does not need to be included in the form, but additional documentation will require more information.

The additional information form can be completed online using the following link: https://www.gov.uk/guidance/submit-detailed-information-before-you-claim-research-and-development-rd-tax-relief

2. Advance Claim Notification Form:

HMRC has made another addition to the process, a new claim notification form for claims relating to accounting periods beginning on 1 April 2023. This form must be submitted within the "Claim Notice Period".

New claimants or those who have not claimed for three years must complete a claim notification form for accounting periods beginning on or after 1 April 2023.

The "claim form notification period" is defined as:

• Commences from the first day of the accounting period which aligns with the accounting period for which the claim is made or falls within.
• The account will end on the last day of the six-month period beginning on the day following that period.
• It is important to note that "period of account" may not be the same as "period of accounting".

Detailed information about the claim notification form can be found at:https://www.gov.uk/guidance/tell-hmrc-that-youre-planning-to-claim-research-and-development-rd-tax-relief

Other Changes

• qualifying costs: The costs related to datasets and cloud computing will now be included in the categories of R&D spending as of 1 April 2023. The majority of UK tech companies will benefit from this action.
• Wider scope of R&D: For accounting periods beginning on or after 1 April 2023, R&D in pure mathematics will also be eligible for exemption. The updated guidelines state that mathematical advances will be considered science even if they relate to the physical and material universe. This expanded definition includes activities as diverse as developing new mathematical models, studying mathematical structures and symmetries, exploring new mathematical concepts, and even exploring the foundations of mathematics.
• Going Concern:Starting on April 1, 2023, a company that is financially sound but no longer qualifies as a "going concern" because it has transferred a trade outside of the corporation may still be eligible for R&D (research and development) relief. This means that a business can still receive R&D relief even if it undergoes a trade transfer as long as it continues to be profitable.

There are several other significant changes on the horizon in the area of ​​research and development (R&D) tax credits, particularly for small and medium-sized enterprises (SMEs). The government recently released a tax consultation document to gather feedback on the creation of a single, simplified R&D tax credit scheme in January 2023. This new scheme is inspired by the already existing Research and Development Expenditure Credit (RDEC) scheme. To stay informed, it is recommended to read HMRC's consultation document!, as they provide valuable insights into the proposed changes and potential impacts on SMEs.

Conclusion

If you have any further questions or would like to know how the evolving R&D tax credit system may affect your company's R&D claim, we encourage you to contact our R&D tax specialist team.

We'll be able to provide you with more information and guidance tailored to your specific situation – to help you resolve your concerns, understand the changing landscape and determine whether your company qualifies for valid relief claims based on its qualifying R&D activities.

About the author



Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.