The key things you need to know about the upcoming changes to the SME R&D Tax Relief scheme.
On 1 April 2023, a range of changes to SME R&D Tax Relief will come into effect.
They represent one of the most substantial updates to the scheme since its launch more than 20 years ago and will significantly alter the way many small and medium-sized businesses interact with this valuable source of innovation funding.
This blog lays out exactly what is changing and what the consequences could be for your upcoming claim.
For a deeper understanding, speak directly to one of our R&D Tax Relief specialists.
SME R&D Tax Relief is falling
The government is cutting SME R&D Tax Relief by up to 54%.
The enhancement rate is falling from 130% to 86%, and the surrender rate from 14.5% to 10%.
These changes will affect R&D expenditure you incur on or after 1 April 2023.
If your financial year straddles 1 April, you’ll need to separate expenditures that occured before and after this date and apply the correct relief rate.
Some unprofitable SMEs that invest heavily in R&D will qualify for additional funding through the enhanced R&D intensive support (ERIS) scheme, which offers a more generous relief rate of 27%.
Here’s how these changes affect the relief rates available to companies in different financial situations.
| Financial Position | Relief Before 1 April 2023 | Relief After 1 April 2023 | Change |
|---|---|---|---|
|
Loss-Making |
33.35% |
18.6% |
-44.23% |
|
Breaking Even |
18.85% |
8.6% |
-54.38% |
|
Profitable |
24.7% |
16.34% to 21.5% |
-33.85% to -12.96% |
On 1 April, the corporation tax rate for companies making profits of over £50,000 will increase from 19% to 25%.
Companies with profits of between £50,000 and £250,000 will receive a marginal relief, creating “a gradual increase in the effective Corporation Tax rate.”
For companies with profits over £250,000, the R&D Tax Relief rate will be 21.5%, not 16.34%. This is because they will have a larger tax bill to offset.
International subcontractor costs ineligible for relief
Costs associated with subcontractors and externally provided workers (EPWs) based overseas will, in most cases, no longer be eligible for relief.
To qualify for relief, payments to EPWs must be subject to PAYE and National Insurance Contributions (NIC). That is unless it counts as qualifying overseas expenditure (QOE).
To qualify as QOE, an externally provided worker or subcontractor cost must satisfy the following three factors:
- The conditions necessary for the R&D don’t exist in the UK
- Those conditions are present where the R&D is taking place
- It would be “wholly unreasonable” to create those conditions in the UK
An example of a situation that would meet these three factors would be if you are working with subcontractors to field test a device designed to work in arctic conditions.
This change, which applies to accounting periods starting on or after 1 April 2024, will be a big blow to SMEs, many of whom cannot afford to pay the fees commanded by domestic providers.
Additional claim requirements
In an effort to clamp down on fraudulent and abusive claims, the government is requiring companies to submit much more information alongside their R&D Tax Relief claims.
This includes:
- A detailed account of your qualifying expenditure, broken out by the eight types of eligible cost
- The number of projects you worked on
- A detailed description of your projects answering the following 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?
- The number of EPWs that worked on the project
- Contact details for the main internal R&D contact and any agent who assisted with the claim
GrantTree produces much of this information as a standard part of our claim preparation process. If you need any help gathering these details, just get in touch.
Cloud, data, and mathematics costs become eligible
In a more positive development, certain cloud computing, data licensing, and mathematics-related costs will be eligible for relief.
As with other qualifying expenditure, the cost must directly contribute to the resolution of scientific or technological uncertainty.
Where a dataset or cloud computing service is used both in and outside of R&D, you’ll be able to claim relief on a ‘reasonable’ apportionment of the associated costs.
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.
The government is also updating the R&D Tax Relief guidelines to clarify that activities relating to pure mathematics – i.e. those that do not necessarily have a practical application – will qualify for relief.
These changes will apply to accounting periods starting on or after 1 April.
You may need to submit a claim notification form
If you have not claimed R&D Tax Relief before or have not claimed in any of the last three accounting periods, you will need to submit a claim notification form before you file your claim.
Timing:
- You’ll need to submit this claim notification within 6 months of the end of the accounting period you’re claiming for
- You can submit the notification as early as the first day of the financial period
- This applies to accounting periods starting on or after 1 April 2023
HMRC says it will provide more guidance – including official documentation – in the next few months.
Questions about these changes?
If you have any questions about these changes, my colleagues and I are here to help. Just drop us a line via the link below, and we’ll be right with you.
