R&D tax credits changed from April 2023 – find out how it could affect your business

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SeedLegals

Benedict Conry - Tax Specialist
Suzanne Worthington - Senior Writer

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R&D tax relief has long rewarded companies that work on innovative projects in the UK.

From April 2023, changes were made to the cost categories and rate changes for both the SME and RDEC schemes. If you work in a data-intensive industry, this could be good news for you.

Changes to R&D qualifying costs

There are five cost categories for R&D:

  • Staffing costs (payroll)
  • Subcontracted costs (SME only, cannot be included in RDEC unless the staff are from a qualifying body)
  • Expenditure on externally provided workers (for example, agency workers)
  • Consumables (utilities and raw materials used during R&D)
  • Software costs (for example, CAD, CAM, Atlassian)

    • These categories will stay in place, but from 1 April 2023, new criteria apply:

    Cloud and data costs are eligible

    Previously, costs relating to cloud-based technology and data software licences couldn’t be included in an R&D claim.

    But for accounting periods starting on or after 1 April 2023, you’ll be able to include these costs in your claim. This is great news for companies who use cloud-based services and rely on data for their research.

    Pure maths is eligible

    Previously, activities which relate to pure mathematics weren’t eligible for inclusion in R&D claims.

    The government has updated the R&D relief guidelines to expand the definition of ‘science’ to include ‘mathematical advances’ as science. This means that from 1 April 2023, you can claim a proportion of costs relating to pure maths activities – great news for companies doing R&D in quantum computing, deeptech and more.

    No overseas R&D

    Subcontracted spend from outside the UK will no longer be eligible for inclusion in R&D claims. The aim of this is to bring more R&D activity to the UK and incentivise companies to move operations into the UK.

    Update: In the Spring Budget 2023, the government announced that this change to R&D tax relief rules would come into effect from 1 April 2024. This means companies have more time to find alternatives to hiring non-UK subcontractors.

    You must make your R&D claim online

    It’s not just the qualifying costs that are changing. HMRC has also updated the way you need to submit your R&D claim for accounting periods starting on or after 1 April 2023:

  • Submit the claim online alongside your Corporation Tax return (not by email or post)
  • Include a summary of the cost categories included in the claim
  • You’ll need to include a brief description of qualifying R&D activities. When you claim with SeedLegals, we already guide you to do this.
  • Name a senior officer of the company responsible for your R&D claim. For example, one of the directors.
  • Include details of any advisor you used to help with your claim

    • For full details about the information you’ll need to include, read the guidance at the HMRC website.

    You must notify HMRC in advance

    For accounting periods starting on or after 1 April 2023, HMRC has added a new requirement that you must notify them before you make a claim.

    You’ll need to fill in an online form to notify HMRC that you intend to make a claim within six months from the end of the accounting period which your claim covers.

    This requirement doesn’t apply if you made a claim in one of the three previous accounting periods.

    To check if you need to notify HMRC in advance and how to send your notifications, read the detailed guidance at the HMRC website.

    Relief rates for the SME scheme are decreasing

    The government announced rate changes to the R&D schemes in the Autumn Statement. These changes were approved by Parliament and became law in January 2023.

    The SME R&D scheme benefit for loss-making companies will decrease from a maximum of 33% cash back to 18.6%.

  • The enhanced deduction rate will be reduced from 130% to 86%
  • The ‘surrender’ rate of 14.5% will be decreased to 10%, meaning that the maximum tax benefit for loss-making companies will be 18.6%
  • Before the changes, the benefit for loss-making SMEs was worth 33p for every £1 of R&D spend
  • When changes come into effect, the benefit for loss-making SMEs will be worth 18.6p for every £1 of R&D spend
  • Profit-making SMEs can expect to receive up to 16.34p for every £1 spent on R&D

    • Relief rates for the RDEC scheme are increasing

    The RDEC rate will increase from 13% to 20%. That means that the overall tax benefit from the RDEC scheme will increase from 10.54% to 16.2%. These changes became law in January 2023.

  • Before the increase in Corporation Tax, RDEC claims will be worth 10.53p for every £1 spend on R&D
  • When changes come into effect from April 2023, RDEC claims relating to accounting periods beginning on or after 1 April 2023 will be worth 9.75p for every £1 spent on R&D

    • How Corporation Tax rate changes affect R&D claims

    In 2021, the government announced a rise to Corporation Tax which comes into effect on 1 April 2023.

    The rate rise will hit profit-making companies hardest and make calculating their tax rate more complicated:

  • Profit up to £50,000 – continue to pay 19% Corporation Tax
  • Profit over £250,000 – pay an increased rate of 25%
  • Profit £50,000 to £250,000 – pay the 25% rate but can also claim ‘marginal rate relief’ to reduce the rate to 19 to 25%

    • For companies making a profit:

  • Claiming R&D relief under the SME scheme – the increased Corporation Tax rate means you’ll get a higher rate of tax relief
  • Claiming R&D relief under the RDEC scheme – the overall benefit will decrease because RDEC is an ‘above the line’ credit which means it’s taxable at the Corporation Tax rate.

    • Talk to the R&D experts

    Not sure how these changes will affect your business? Need some help with your claim? Book a free call with our R&D experts.

    Writer: Benedict Conry – Tax Specialist

    Editor: Suzanne Worthington – Senior Writer

    This article was first published on 22 November 2022 and updated on 13 April 2023. View original article here.