Now the dust has settled on yesterday’s budget, here’s a few key takeaway points that will impact R&D claimants going forward:
✅ Loss making “research-intensive” SME’s – Where 40% of incurred costs relate to R&D activities, a revised 27% credit will be in place. Although this is not quite as generous as the current rate of 33%, this will assist early years start-ups and many others, protecting them from the up and coming changes as detailed in the 2023 Finance Bill, reducing the credit rate to 18.6%. This change will come into effect in the Finance Bill 2024.
🕓 The proposed restrictions on certain overseas expenditure have been delayed and will not apply from 1 April 2023, instead this will take effect from 1 April 2024. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief.
🔁 The Budget yesterday provided an update on the governments’ consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes, which closed on the 13th March. The government is currently considering the responses and no decision has been made currently but intents to keep open the option of implementing a merged scheme from April 2024.
If you have any questions, please feel free to reach out.
From Tolleys:
The Government had previously published draft legislation providing for a number of changes to the research and development (R&D) tax reliefs which are due to apply to accounting periods beginning on or after 1 April 2023.
The draft legislation included the following major changes:
- Two new categories of expenditure qualifying for relief will be introduced. These are the costs of data licenses and cloud computing services. A data licence is defined as one to access and use a collection of data services. Cloud computing services include providing access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities. Amendments are also to be made to the patent box legislation, which applies the R&D definitions of qualifying expenditure in its calculations, to include data and cloud computing costs.
- The exclusion of pure mathematics from relief will be removed. This measure is to be introduced by statutory instrument.
- Relief for subcontracted work and externally provided workers will be limited to focus on UK activity. Expenditure must either be ‘UK expenditure’ on R&D in the UK or ‘qualifying overseas expenditure’ undertaken outside the UK because the necessary conditions are not present in the UK due to geographical, environmental or social factors (for example deep ocean research) or due to legal or regulatory requirements (for example clinical trials).
- All claims to R&D reliefs will have to be made digitally. Claims will have to include certain additional information to be valid, including a breakdown of costs across the qualifying categories and a description of the R&D. A claim will have to be endorsed by a named senior company officer and will have to include details of any agent advising on the claim. Additionally, companies will be required to inform HMRC in advance that they intend to make a claim within six months of the end of the accounting period to which it relates by making an online ‘claim notification’. There will be an exception to the latter requirement for companies which have claimed in any of the three preceding accounting periods. Secondary legislation will detail the information to be included with a claim or a claim notification
In addition to the major changes outlined above, the draft legislation also includes eight minor changes. These include measures to deal with various anomalies relating to the making of claims and the administration of the schemes.
As part of Spring Budget 2023, the Government confirmed that the reforms previously announced will be implemented as part of Finance (No 2) Bill 2023, but with the following changes:
- the proposed restrictions on certain overseas expenditure will not apply from 1 April 2023, but will instead be postponed and take effect from 1 April 2024. This is designed to allow the Government additional time to consider the interaction between this restriction and the design of a new single R&D scheme, which has been subject to consultation recently. The Government announced that it will publish draft legislation on a merged scheme for technical consultation in summer 2023, along with a summary of responses to the consultation
- the requirement to provide additional information (such as the breakdown of costs and a description of the R&D as part of the claim) will need to be made using a compulsory additional information form. This requirement will apply to any claim made on or after 1 August 2023
Apart from these two changes, all other measures will have effect for accounting periods beginning on or after 1 April 2023, as previously confirmed.
In addition to these changes, the Government also announced that from 1 April 2023, an increased rate for the repayable tax credit for loss-making R&D intensive small and medium size enterprises (SMEs) of 14.5% (rather than 10%) will apply. To qualify, at least 40% of the SME’s total expenditure must relate to R&D. The change will be legislated for in Finance Bill 2024 and eligible companies will be able to claim once the legislation is in place. This effectively means that eligible companies can claim the current 10% rate that applies from 1 April 2023 and submit an amended claim once the legislation is in place or delay submission of their claim. Relief will be claimed as normal on the return, but on the additional information form (see above) companies should indicate whether or not they are claiming as R&D intensive companies.
