Research and Development (R&D) tax relief is a highly valuable relief to promote and reward attempts by companies to achieve advances in scientific or technological fields or appreciable improvements in associated processes. The scheme is especially important to the manufacturing sector with 21% of the total claims made, and over £1.5bn of annual support received, by the sector in the latest statistics.
The government has introduced changes to refocus the regime, ensuring that it is more effectively targeted towards profitable SME companies, whilst retaining a positive level of financial support for R&D intensive loss-making companies. With increased rates under the R&D Expenditure Credit scheme (RDEC), it is clear the government intends to support larger companies, where innovation could have a more significant economic impact. The changes also incorporate measures to reduce the risk of fraudulent claims. Please find a summary of key changes below:
- Increased tax savings for profitable companies through SME enhanced relief
- Tax repayment credit drops significantly for loss making companies, but R&D intensive companies are insulated from part of the reduction
- Increased tax benefit for organisations qualifying under RDEC scheme
- Adaption to qualifying criteria to recognise the importance of pure mathematics in fields such as software and AI innovation
- R&D project costs relating to cloud computing and digital data are now included
- Proposed restrictions for non-UK expenditure have been put on hold until 2024
- From August 2023 R&D claims will need to be submitted digitally and with more detail approved by a named officer
- Government is also reviewing whether to operate a merged scheme from April 2024, which could impact benefits and requirements for SME companies
| AREA | BEFORE 1 APRIL 2023 | AFTER 1 APRIL 2023 | COMMENT | IMPACT |
| Rate of SME enhanced relief for qualifying costs | 230% | 186% | For profitable companies paying corporation tax at standard rate of 25% (19% pre-April) the effective tax saving increases from £43.70 per £100 of spending to £46.50. | Tax saving increases by up to £2.80 per £100 of qualifying spending |
| Repayment credit rate for most loss-making companies | 14.5% of enhanced amount = £33.35 per £100 | 10% of enhanced amount = £18.60 per £100 | Loss making companies relying on claims for cashflow need to plan ahead for the financial shortfall. | Tax repayment credit drops by £14.75 per £100 of qualifying spending |
| Repayment rate for innovative companies >30% expenditure is qualifying | N/A | 14.5% of enhanced amount = £26.97 per £100 | Rate retained to support highly innovative and start-up companies that could drive economic growth. | Tax repayment credit drops by £6.38 per £100 of qualifying spending |
| Large scheme (RDEC) rate | 13% headline rate (10.5% post tax) | 20% headline rate (15% post tax) | Evidence of intention to focus relief towards encouraging innovation in larger companies where economic impact could be more significant and fraud risk is lower. | Benefit increases by £4.50 per £100 of spending |
| Projects & expenditure in pure mathematics | Non-qualifying | Qualifying | Enables claims on previously excluded projects and recognises the importance of mathematical work and modelling in fields related to software development and Artificial Intelligence. | Chance to broaden claims |
| Cloud computing & digital data costs (inc. provision & maintenance) | Generally excluded | Eligible | This will enable a number of businesses to enhance their claims. | Chance to increase expenditure being enhanced |
| Restrictions for non-UK expenditure | No specific restrictions | Proposed restrictions deferred until April 2024 | Positive to see these deferred but we expect these to be considered in conjunction with potential reforms to the whole regime that are being considered from April 2024. | Not applicable |
| Submission requirements | No specific requirements | From August 23 digital submission format with more detail and by named officer or 3rd party | Changes intended to: – Improve quality of submissions and enable digital interrogation – Hold individuals and agents accountable for submissions – Reduce instances of fraud or poor practice within the scheme | Increases obligation on company and its advisers, reducing fraud & error |
What action should companies take now?
Companies should take relevant steps, in conjunction with their advisers, to ensure they are well prepared to profit from, or minimise the impact, of the changes by:
- Actively monitoring projects to ensure that claim deadlines are not missed
- Reviewing ongoing projects to determine which will qualify for relief
- Review how project expenditure is tracked to improve effectiveness
- Identify cloud and data storage costs that could enhance claims
- Review impact on cashflows from changes to repayment claim rates to enable early action to manage financial pressures
- Review the impact of any loss of enhanced relief on offshore costs to determine whether you may want to change operational model
If you would like to discuss the scheme or the changes, our R&D team would be pleased to support you: