Research & Development (R&D) tax relief changes – how they work in practice
Research & Development (R&D) tax relief changes – how they work in practice
Research & Development (R&D) tax relief changes – how they work in practice
Research & Development (R&D) tax relief changes – how they work in practice
Find detailed analysis of HMRC’s Autumn 2023 proposal to merge the two R&D tax relief schemes, including expected changes and what they might mean for your business here.
In the 2023 Autumn Statement, the Chancellor announced the merging of the RDEC and SME schemes, which will come into force on 1 April 2024. Get the full details of the proposed merged scheme here.
Research & Development (R&D) tax relief can provide valuable financial support if you are a business that is investing in innovation and developing new processes, products or services. Understanding exactly how the R&D tax relief regimes work and when the many different changes come into force may be of critical importance to your financial projections.
Important changes to the way R&D claims must be made to effect from 8 August 2023, requiring companies to provide an Additional Information Form – get the full details.
The government has a target to raise investment in R&D to 2.4% of UK GDP by 2027. R&D tax relief contributes to that goal by reducing the cost of innovation for UK companies and the Government wants to make it more effective to increase “additionality” – the extra R&D spend that companies claiming the relief make. It is also introducing changes to the claims process in order to tackle errors and suspected abuse of the R&D tax relief regime – see above.
As of April 2024, the two separate RDEC and SME tax credit schemes will be merged, both to streamline the relief and help control its overall cost .
Find full analysis of the proposed changes to the R&D tax relief schemes here.
The Government has announced changes to the rates of relief in the past few Autumn Statements and Budgets – the latest position is shown below:
SME Scheme | RDEC Scheme | Merged Scheme | |||
---|---|---|---|---|---|
Up to 31/03/2023 | From 01/04/2023 | Up to 31/03/2023 | From 01/04/2023 | From 01/04/2024 | |
Profitable company | 130% uplift on costs = 24.7% net benefit | 86% uplift on costs = 21.5% net benefit | Headline rate 13% = 10.5% post tax | Headline rate 20% = post tax rate between 14.7% - 16.2%* | Headline rate 20% = post tax rate between 14.7% - 16.2%* |
Loss making company | Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy | Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy | 10.5% subsidy | 15% subsidy | 16.2% subsidy |
Loss making R&D intensive company** | NA | Costs plus 86% uplift = 186 x 14.5% repayable credit = 26.97% subsidy | NA | NA | NA |
* The post tax RDEC/Merged scheme rates from 1 April 2023 will vary depending on the level of taxable profits a company has and corporation tax rate applied to those profits. The Net RDEC at the main rate of CT (25%) is 15%, for the small companies rate (19%) is 16.2% and for companies paying tax in the marginal rate band (26.5%) is 14.7%.
**Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% (from 1 April 2023) or 30% (from 1 April 2024) of total expenditure (splitting accounting periods as required). Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and by subtracting any amount not deductible for CT purposes. While this higher rate is intended to apply for the 2023/24 tax year, it will be legislated for in Finance Bill 2023-24 which is expected to become law in spring 2024, therefore, these relief rates cannot yet be used for accounting purposes.
Many R&D costs can be claimed when they are incurred but this does not always apply. For example, costs covering a period of time, such as employee bonuses, will need to be apportioned on the accruals basis.
If you don’t have a year-end date of 31 March, you will also need to do a split period calculation for R&D costs to ensure you apply the correct rates of relief. In some cases, where apportioning costs is challenging, HMRC may accept a blended rate of relief for a period that straddles a rate change, if it doesn’t materially impact your claims.
It has been confirmed that the repayable credit available under the merged scheme will be based on the more generous cap under the existing SME scheme –Read more on the SME cap.
In addition to the rate changes, a number of technical and administrative changes are on the way, but these apply for accounting periods starting on or after 1 April 2023 or April 2024.
ABC Limited’s accounting year end is 30 September, it has several ongoing R&D projects, and qualifies as an “non-R&D intensive" SME. It is outsourcing some of its software development to a third party in India, and incurs cloud computing costs in running test routines for products and services in development.
The apportionments ABC Limited will have to do to compile its R&D claim for the accounting year to 30 September 2023 will at least include:
Software development costs outsourced to India – these will be allowable for this accounting year based on the work actually done in the periods:
1 October to 31 March – claim relief on 65% of costs, with 130% uplift
1 April to 30 September - claim relief on 65% of costs, with 86% uplift
UK direct costs for project – claim 100% of the amounts attributable to the qualifying R&D, and apportion before and after 31 March to apply 130% and 86% uplifts or, if consistent through the year, agree with HMRC that a blended uplift rate of 108% can be applied.
ABC Limited will not be able to claim for its cloud computing costs for the year ended 30 September 2023, as this year commences prior to the 1 April 2023. By comparison, ABC Limited will be able to claim for its cloud computing costs for the year ended 30 September 2024. For the year ended 30 September 2025, it will see its R&D relief restricted to RDEC rates under the new merged scheme and will be prevented from claiming overseas development costs.
The process of making an R&D tax claim can be complicated but there are some simple things you can do to improve the accuracy and the effectiveness of your R&D claims. Follow some basic best practice advice, get expert advice and consider using our R&D tax claim tool to calculate and risk assess your claim.
Carrie Rutland
Dawn Register
Eyad Hamouieh