From 1 April 2023, R&D SME tax relief will be cut from an additional deduction of 130% of qualifying costs to 86%. In addition, the repayable tax credit which is available for loss making companies will be cut from 14.5% to 10%.
The actual tax benefit lost will vary according to the profits or losses made in the company and its corresponding tax rate. Worst hit will be loss making companies that surrender their R&D loss for a repayable tax credit. For expenditure incurred after 1 April 2023, a loss-making company spending £100,000 on qualifying R&D will only be able to claim a repayable tax credit of £18,600, whereas in the current year they could claim up to £33,350. Companies that have accounting periods straddling 31 March 2023 will need to apportion their R&D expenditure between that incurred pre and post 1 April. They will effectively have 2 R&D claims in the one accounting period.
From 1 April 2023, the research and development expenditure credit, primarily aimed at large companies but also at companies who receive funding for their R&D work, will be increased from 13% to 20%. In most cases this increases the net tax saving from 10.5% to 15% of the qualifying expenditure.
The primary reasons for the reduction in the SME scheme and the increase in the RDEC scheme are the perceived abuse of the SME scheme and also a recent report which concluded that higher levels of private sector R&D investment are generated for every £1 of tax relief given under the RDEC scheme that the SME scheme. Therefore, there is an expectation that these schemes will gradually be merged into one.
Additional changes that were announced last year in respect of the compliance around both R&D schemes are also still going ahead. These changes affect accounting periods beginning after 1 April 2023 and are again designed to reduce fraudulent claims. The main compliance changes are:
- A report describing the R&D projects carried out and breaking down the qualifying costs must be submitted as part of a claim
- Claims will need to be endorsed by a named senior officer of the claimant company
- Any agent who has helped in preparing a claim will also need to be disclosed – i.e., PM+M.
- Companies planning to make a claim, who haven’t previously claimed, will have to notify HMRC of their R&D activity within 6 months of the year-end in question. It is expected that this will be done through an on-line portal, but no further details have yet been released.
The government have also legislated to ensure that most R&D is actually performed in the UK, and from April 2023 subcontracted R&D work or work done by externally provided workers will only qualify for relief if this work is carried out in the UK. There are some exceptions to this, but these are very limited.
Finally, on a more positive note qualifying expenditure under both schemes has been extended for accounting periods beginning after 1 April 2023 to include pure maths, cloud computing and license payments for datasets.
Overall, we can see a tightening up of the R&D scheme as a whole and a movement towards an RDEC style scheme for all companies regardless of size. It is important for companies to ensure that they maximise their claims as far as possible but to ensure they have robust evidence of the projects carried out and the qualifying costs incurred. SME’s engaged in sizeable R&D projects may want to consider the timing of their spending to see how much can be incurred prior to 1 April 2023 under the current scheme.