Everything you need to know about the changes to R&D Tax Relief that have taken place in 2023.
These changes impact how much R&D Tax Relief you’re entitled to, which costs you can claim, and what information you need to provide HMRC to prove you’re eligible.
It’s vital you account for these changes in your upcoming submissions. If you don’t, HMRC could reject your claim and launch a time-consuming enquiry, which will delay your relief by several months and damage the agency’s trust in your accounts.
In this blog, I will explain each of the changes that have come into force – and the new reporting requirements that take effect later this year – and what they mean for your claims.
If you have any questions about these changes or are looking for help understanding how they impact your business, our experts would be happy to help. Just leave us a message, and one of our team will be with you shortly
SME R&D Tax Relief decrease
The government has reduced the enhancement rate from 130% to 86%. It has also reduced the surrender rate from 14.5% to 10% for non-R&D-intensive SMEs.
An R&D-intensive SME is one that invests at least 40% of its total outgoings in qualifying expenditure.
These changes affect expenditure made on or after 1 April 2023.
The provision for R&D-intensive SMEs was announced during the March 2023 Spring Budget, while the reductions were announced during the 2022 Autumn statement.
Here’s how these changes affect the relief available to companies in different financial situations.
| Financial Position | Relief Before 1 April 2023 | Relief From 1 April 2023 | Change |
|---|---|---|---|
|
Loss-Making |
33.35% |
18.6% to 26.97% |
-6.35% to -44.23% |
|
Breaking Even |
18.85% |
8.6% to 12.04% |
-36.13% to -54.38% |
|
Profitable |
24.7% |
16.34% to 21.5% |
-33.85% to -12.96% |
SME rate changes and corporation tax rise
If your company is profitable, the reduced enhancement rate may be partially offset by the corporation tax rise.
Now, companies with profits over £250,000 will pay a corporation tax rate of 25%.
Companies with profits between £50,000 and £250,000 will pay somewhere between the current 19% rate and the new 25% tariff.
This means if your company has profits of over £250,000, your relief will be worth 21.5% of your qualifying expenditure, up from 16.34%.
RDEC increase
The government increased the Research and Development expenditure credit (RDEC) rate from 13% to 20%. This also affects expenditures made on or after 1 April 2023.
As an above-the-line credit, RDEC is subject to corporation tax. So, it is also subject to the increased corporation tax rate.
Here’s what this means for your funding.
| Original RDEC Relief rate | Original RDEC Rate After Tax | New RDEC Relief Rate | New RDEC Rate After Tax |
|---|---|---|---|
|
13% |
10.5% |
20% |
16.2% to 15% |
As you can see, if you are claiming RDEC, you will receive between 42% and 54% more tax relief.
This is particularly good news for grant winners, who, because of state aid rules, usually need to claim through the RDEC scheme.
Cloud, data, and mathematics costs eligible for relief
Some cloud computing solutions and data licensing costs are now eligible for relief.
The government has also amended the Department for Business, Energy and Industrial Strategy (BEIS) guidelines to include activities relating to pure mathematics as qualifying development work.
As with other qualifying expenditures, costs associated with these activities must contribute to resolving a scientific or technological uncertainty.
If you are using a dataset or cloud computing service – such as AWS – for both qualifying and non-qualifying work, HMRC will allow you to apportion a ‘reasonable’ percentage of the costs to your claim.
Costs associated with creating a dataset – wages for employees that were involved, for instance – will be eligible for relief. Data licensing fees will also be eligible for relief unless you are contractually allowed to publish the data or sell to or share it with a third party.
These changes will apply to financial periods starting on or after 1 April 2023.
New claim requirements
As of 8 August 2023, you now need to submit an additional information form (AIF) containing detailed financial and technical information about your development work.
If you don’t submit the AIF, HMRC will automatically reject your claim.
Between 8 August and 3 September, HMRC revealed roughly half of claimants had omitted the AIF, resulting in their claims being rejected.
Here’s what you need to provide.
Technical information
You will also need to provide a detailed description of some or all of the projects in your claim.
Your descriptions must be separated into answers to the following six questions:
- What is the main field of science or technology?
- 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?
- Which scheme you’re applying to, and how much you’re looking to claim
How many projects do I need to describe?
Thankfully, you don’t necessarily need to describe all of your projects.
The number of projects you need to describe depends on how many projects you are claiming for.
This table explains how many projects you need to describe in your technical report.
| Projects Conducted | Projects to Describe |
|---|---|
|
1-3 |
All of your projects |
|
4-10 |
At least 3, and enough to describe the projects that account for at least 50% of your total expenditure |
|
>10 |
At least 3, and enough to describe the projects that account for at least 50% of your total expenditure. If the qualifying expenditure is split across a number of smaller projects, you only need to describe the latest 10 |
Financial information
You will need to provide a detailed account of your qualifying expenditure, broken out by the nine categories of qualifying costs.
The nine categories are:
- Staff costs
- Externally provided workers
- Subcontractor costs
- Software
- Consumable items
- Payments to participants of a clinical trial
- Data licence costs
- Contributions to independent R&D costs
- Cloud computing services, including storage*
*These costs become eligible in accounting periods taking place on or after 1 April 2023
The costs you are able to claim differ depending on whether you are applying for SME R&D Tax Relief or RDEC.
You’ll also need to identify the amount of qualifying expenditure that relates to each specific project.
Qualifying indirect activities
You will also need to tell HMRC how much of your expenditure on each project went to qualifying indirect activities.
Indirect activities are tasks that support your development work without directly contributing to a scientific or technological advance. Project management and analysis, for example.
Expenditure on indirect activities cannot include spending on cloud computing or data licensing.
Company information
Lastly, you will also need to provide a series of specifics about your company. This section will be easiest to complete; the information will be familiar to anyone that has worked on company accounts.
- Your company’s Unique Taxpayer Reference (UTR) number
- Your employer PAYE reference number
- Your VAT registration number
- Your business type, for example, by providing its current SIC code
- Contact details for the main senior person at your company responsible for your R&D claim
- Contact details for any agent that helped you prepare your claim
We believe that HMRC is using SIC codes to target enquiries. The fact the government is asking companies to supply a SIC code with their submission supports this idea.
If you want any advice on meeting these new, stricter claim requirements, get in touch.
Claim notification form
If your company hasn’t claimed R&D Tax Relief before or in the last three accounting periods, you will need to submit a claim notification form before you file.
In this form, which is available here, you will need to provide:
- Your company’s UTR
- Contact details of the main internal R&D contact
- Contact details for any agents that helped you prepare your R&D claim
- The agent reference number (if applicable)
- Start and end date for the period of accounts
- Start and end dates for the accounting period you are claiming R&D Tax Relief for
As you can see from the graphic below, you’ll need to submit the pre-notification within 6 months of the end of your company’s accounting period.
You can submit the notification as soon as you start the accounting period during which you’re going to conduct R&D.
UK subcontractor requirement delayed until 2024
The government has postponed plans to remove SME R&D Tax Relief on costs associated with subcontractors and externally provided workers (EPWs) based overseas until 1 April 2024.
This news will bring great relief to the many startups and scale-ups which use offshoring to access much-needed skills in a way that is cost-effective.
The delay is designed to give the government more time to consider merging SME R&D Tax Relief and RDEC into a single scheme. Likely, a united scheme would offer one flat rate of relief, regardless of an applicant’s financial position, just as RDEC does at the moment.
The government recently completed a consultation on the proposed merger. It has promised to announce the results of its deliberations on combining the schemes at a future fiscal event, such as a budget statement.
Let GrantTree navigate these changes for you
We are in a period of unprecedented change for R&D Tax Relief.
If that wasn’t enough, HMRC’s more thorough approach to compliance is putting companies under huge pressure to make sure their claims are 100% accurate and in line with all current regulations.
If you have any questions about these changes or would like expert assistance preparing your upcoming R&D Tax Relief claim, our tax and technical specialists are standing by to help you.
Just drop us a line, and we’ll get back to you within 24 hours.
