Changes to the research and development (R&D) tax regime were anticipated in the Autumn Statement as there has been increased pressure on the government to tackle the abuse of the R&D scheme. However, the Chancellor has chosen to significantly reduce the amount of relief available to SME claimants whilst increasing the relief to the larger RDEC claimants.
SME regime changes
At present SME claimants are able to claim an additional 130% tax deduction on qualifying R&D expenditure. From 1 April 2023 this will reduce to 86%. This means the additional tax saving on £100,000 of R&D expenditure will reduce from £24,700 to £21,500 taking into consideration the increase in corporation tax to 25% from April 2023.
For loss making companies the impact is more significant as the surrenderable R&D tax credit is reducing from the current rate of 14.5% to 10%. Based on qualifying R&D expenditure of £100,000 the maximum tax credit available is currently £33,350 which will reduce to £18,600 from 1 April 2023. A reduction of nearly 55%.
This is likely to have an impact on many start up businesses who are reliant on R&D tax credits to assist with their cashflow during the first few years of development. The timing of the changes also does not provide much time to prepare for the changes.
RDEC regime changes
On the other hand larger companies claiming under the RDEC regime are set to benefit under the scheme from 1 April 2023. The RDEC rate is due to increase from 13% to 20%. This means that that when spending £100,000 on R&D the additional tax saving will increase from £10,530 to £15,000.
The government have confirmed the rate changes are intended to assist a move towards a single simplified R&D scheme, which will make the UK R&D scheme more competitive internationally.
In addition to the above rate changes, previously announced changes are still due to be implemented and are expected to apply from 1 April 2023. This includes restrictions on overseas workers, inclusion of data and cloud costs, together with further compliance requirements. These changes are summarised as follows:-
At present it is possible to claim for subcontractors and externally provided workers carrying out activities overseas. This will no longer be possible from 1 April 2023, unless it is not possible to carry out the R&D activities within the UK. This may apply due to geographical, environmental or social conditions. There may also be legal or regulatory requirements which prevent the R&D being carried out within the UK.
This is likely to have an impact on companies if they are currently claiming for workers within overseas group companies or overseas third parties.
Data and Cloud costs
Cloud computing costs should be eligible for relief from 1 April 2023. This is a welcome change, as for a long time the R&D legislation has not kept pace with the fast moving pace of software development. There has also been a large amount of confusion amongst tax advisors as to what expenditure is eligible, so the proposed changes will provide some clarity.
The following new categories of expenditure are being introduced:-
- Licence payments for datasets;
- Cloud computing costs that can be attributed to computation, data processing and software.
Payments for datasets will only be eligible if used for R&D purposes, so relief will not be available if the datasets are resold at a later date or have a lasting value to the business following completion of the R&D project. It will be possible to apportion costs, where the licence payments cover multiple data sets.
Further compliance requirements
Claims in the future will need to be endorsed by a named senior officer of the company, together with details of any agent who has assisted with the R&D claim.
Companies who have not submitted a claim within the preceding three years, will need to notify HMRC in advance of their intention to submit an R&D claim. This pre-notification will have to be submitted within 6 months of the end of the period to which the claim relates.
Continuing R&D reform
There has been ongoing consultation taking place with regards to the R&D schemes and this will continue, so more changes are likely in the future.