Recent changes to R&D tax relief

How could the recent changes to the relief impact your claim?

The latest changes to R&D tax relief

A raft of changes to R&D tax relief were implemented on 1 April 2023 which could have an impact on your claims. And with more changes on the horizon, it's vital to be aware of all the latest legislative requirements before submitting your claim.

If you’re already claiming relief, you need to make sure you have a clear understanding of how these changes impact your future claims. For expenditure incurred on or after 1 April 2023:

1. Enhanced deduction

The enhanced deduction available to SMEs for R&D tax relief has fallen from 130% to 86%;

2. SME tax credit

The R&D tax credit available to most SMEs has fallen from 14.5% of tax losses to 10%;

3. R&D Intensive

For loss-making, R&D-intensive* SMEs, the R&D tax credit available remains at 14.5%;

4. RDEC tax credit

The value of tax credits under the RDEC regime has risen from 13% to 20%.

*An R&D-intensive SME is one which incurs 40% of its total expenditure on qualifying R&D activity.

Increase in corporation tax rates

We also saw an increase in the main rate of corporation tax (CT) come into play on 1 April 2023. If your business' profit exceeds £50,000, you will now be liable to a CT rate of up to 25% (previously 19%).

This will make R&D tax relief even more valuable going forward. The enhanced deduction through R&D tax relief could reduce your taxable profits enough to push you down to a lower CT rate. For example, if your company makes more than £250,000 in profit before R&D tax relief and you incur R&D expenditure of £154,000 that will reduce your tax rate back down to 19% instead of 25%.

Example A: Pre-1 April 2023

Profits without R&D tax relief	£250,000
Corporation tax without R&D	£47,500
Qualifying R&D expenditure	£400,000
Claimable enhanced deduction	£520,000
Revised profit/loss	£(270,000)
Potential cash credit	£39,150
Retained in-year profits	£47,500
Total R&D benefit	£86,650

Example B: Post-1 April 23

Profits without R&D tax relief	£250,000
Corporation tax without R&D	£62,500
Qualifying R&D expenditure	£400,000
Claimable enhanced deduction	£344,000
Revised profit/loss	£(94,000)
Potential cash credit	£9,400
Retained in-year profits,	£62,500
Total R&D benefit	£71,900

Updates to the scope of relief

Earlier this year, the scope of R&D tax relief broadened with the inclusion of more types of expenditure. This change ultimately brings the relief in line with the modern-day requirements of innovation, by including expenditure incurred on pure mathematics and more types of software.

For the accounting period beginning on or after 1 April 2023 or after, you will also qualify for relief if you have incurred expenditure on data licenses or cloud computing services (for R&D purposes).

There are some general exclusions to this, such as contractual rights, licensing agreements and whether you're operating your own data services. Ensure you speak to a qualified advisor to get a clear picture as to whether your activities will qualify for relief.

If you are using data or cloud for purposes other than R&D, make sure you keep robust records to show how you're using the licenses.

Additional information requirements

If you are submitting your R&D claim after 8 August 2023, you will need to complete an additional information form.

Evidence is now the most important part of your claim. If you don't have access to the information required, your claim won't be accepted.

As part of the additional information form, you will need to submit:

The name of the individual in your business who is responsible for the R&D claim.
The number of projects you are claiming for.
Descriptions of projects (up to 10 projects) under 5 headings:

What are the costs that you have incurred?
What was the baseline level of science or technology that you planned to advance?
What advance in that scientific or technical knowledge did you aim to achieve?
What scientific or technological uncertainties did you face?
How did your project seek to overcome these uncertainties?

Who is submitting your claim?

Going forward if you’ve engaged with an advisor, they will need to put their name down as the agent on your R&D claim as part of HMRC’s clamp down on fraud and improper claims.

More changes to come

Although changes were recently implemented on 1 April 2023, they won't be stopping there.

HMRC are constantly reviewing, reforming and opening consultations on the relief. These changes could be implemented as early as 2024.

Overseas expenditure

If your business is subcontracting work overseas, you will only qualify for relief in limited circumstances as of 1 April 2024. Instances such as deep sea research or volcanic activity where the innovation cannot take place within the UK may still qualify for relief after this date. To ensure your activities are eligible and compliant, we would highly recommend consulting your advisor.

A potentially merged regime

HMRC are currently exploring how they might merge the two R&D relief regimes together. Part of this explores how the various complex rules might be brought in line to create a fairer system.

We should hear more about this in the coming months. If you're already engaged with us as your advisors, we will update you as soon as we hear anymore information on this.

"If you think your R&D claim may be impacted by these changes, we would highly recommend that you consult a qualified tax advisor on the matter.

They will be able to assess your eligibility, scope your projects and ensure you remain compliant throughout."