On 1 April 2023, several new R&D tax laws came into effect. The core behind these changes is to simplify the R&D tax relief process and encourage businesses to continue investing in R&D. That is laudable, but the language in which the new laws are framed could even confuse R&D advisors. In this blog post, we break down the R&D tax relief changes and explain what they mean for businesses and their claims:
R&D expenses incurred on or after 1 April 2023
The R&D tax relief changes include:
- Tax credit reduced from 14.5% to 10%
- Enhanced deduction for SMEs reduced from 130% to 86%
- Businesses claiming under the RDEC scheme get tax credits raised from 13% to 20%
- Loss-making R&D-intensive SMEs will continue to get a 14.5% tax credit as long as R&D accounts for at least 40% of their total expenditure
If the business in question is eligible for the new tax credit, and if the claim period began before and ended after 1 April 2023, accountants should help them separate the amounts accordingly and apply the right rates to each part.
R&D tax relief claim periods beginning on or after 1 April 2023
There are a few extra R&D tax changes that may or may not apply to your business, including:
- New/lapsed claimants have to submit prenotification for any claim within six months of the claim period ending
- Claims allowed to be switched to RDEC if they were wrongly submitted under SME
- Data and cloud computing costs now part of allowable expenses
Advances in pure mathematics are now eligible to be claimed
R&D tax relief claims submitted on or after 1 August 2023
All companies (apart from those exempt from MTD) must submit their claims using the new digital forms that HMRC will release before this date. Completing these new forms should not take too much time, as you can copy the key data from the business’ R&D report, but it is worth budgeting extra time for claims after 1 August just in case the processing times are higher. Here are some more details about the new forms:
- Businesses will have to break down the costs they claim and include descriptions of the R&D.
- They need to inform HMRC about their plan to make a claim within six months of the end of the period to which the claim pertains.
- The claim forms need to feature details of any agent who has provided advisory services related to the claim.
- The claim must be endorsed by a named senior official at the company.
Why these R&D tax relief changes matter
R&D tax credits encourage businesses of all sizes to invest in activities that create new products/processes, improve existing products/processes and push the frontiers of industry know-how. These reforms were designed to simplify the R&D tax credit claim process and support R&D-intensive small businesses more effectively without increasing the overall cost of supporting R&D by too much.
How HMRC is safeguarding against anomalies
As with any new legislation, there will be teething troubles and confusion as businesses get used to the new claim system. Here is what HMRC is doing to ensure that things operate smoothly and that mistakes/anomalies are kept to a minimum:
- Clarifying that R&D expenditure will generally qualify when a payment is made within two years after the accounting period during which the expenditure occurred
- Increasing the time limit for claiming the end of the relevant accounting period from 12 months to two years
- Changing the rule that did not allow relief for companies that were not a “going concern” to enable R&D tax credit claims in cases where the company ceased to be “going” because trade was transferred
- Supporting businesses growing upward from SME to RDEC status by stating that if an SME in a group is larger than the size thresholds for SMEs, all the businesses in the group can retain SME status for one year after
Which costs qualify under the new laws
To be eligible for R&D tax relief, an expense must be incurred in pursuing advances in science or technology. Expenses related to advances in arts, humanities or social sciences (including economics) are not eligible.
Your accountant will help you determine whether any specific expense qualifies or not. However, broadly speaking, here is what you can claim:
- Consumable items used during the R&D process, including water, fuel, power and materials
- Payments made to volunteers in clinical trials
- Costs of hiring externally provided workers (i.e., those supplied by a staff provider)
- Salaries, wages, pension fund contributions and secondary Class 1 national insurance contributions for employees working directly on the R&D project (but not bonuses, redundancy payments or any staff costs that would have occurred regardless of the R&D project)
- Software licence fees directly related to R&D and a “reasonable” fraction of other software costs for the tools partly used in the R&D process (ask your accountant about how much you can reasonably claim)
- 65% of the R&D costs are made to a subcontractor (100% if the subcontractor is connected with your company)
Costs you cannot claim include:
- Land costs
- Rent or rates
- Capital expenditure
- Costs of getting trademarks or patents
- Costs related to the production and distribution of goods and services
Other circumstances under which you cannot claim costs include:
- The expenses are for work subcontracted to your business
- You have received State aid of more than 7.5 million euros for the project
- You have received any other aid for the project (excluding SME tax relief)
- The expenses are subsidised in some other way, such as a project grant
Over to you
If your business wants to take advantage of the UK government’s tax credits and grants scheme for R&D, Birdfynn Accountants is here to assist you every step. We deeply understand what qualifies as eligible expenditure and what a compliant claim should entail.
Our experienced team is well-versed in negotiating with HMRC to ensure the success of your R&D tax credit claim. So please get in touch with our R&D tax credits accountants today. We are here to help you maximise your claim!
