R&D tax credits changed in April 2023 - find out how those changes affect your business

R&D tax relief has long rewarded companies that work on innovative projects in the UK.

But, starting April 2023, there were changes to the cost categories and rate changes for both the SME and RDEC schemes which mean you would likely get somewhat less, or a lot less, R&D cash back for money spent subsequent to that date.

Contents

• Changes to R&D qualifying costs
• You must make your R&D claim online
• You must notify HMRC in advance
• Relief rates for the SME scheme are decreasing
• Relief rates for the RDEC scheme are increasing
• How Corporation Tax rate changes affect R&D claims
• Talk to the R&D experts

Changes to R&D qualifying costs

There are five cost categories for R&D:

• Staffing costs (payroll)
• Subcontracted costs (SME only, cannot be included in RDEC unless the staff are from a qualifying body)
• Expenditure on externally provided workers (for example, agency workers)
• Consumables (utilities and raw materials used during R&D)
• Software costs (for example, CAD, CAM, Atlassian)

These categories will stay in place, but from 1 April 2023, new criteria apply:

Cloud and data costs are eligible

Previously, costs relating to cloud-based technology and data software licences couldn’t be included in an R&D claim.

But for accounting periods starting on or after 1 April 2023, you can include these costs in your claim. This is great news for companies who use cloud-based services and rely on data for their research.

Pure maths is eligible

Previously, activities which relate to pure mathematics weren’t eligible for inclusion in R&D claims.

The government has updated the R&D relief guidelines to expand the definition of ‘science’ to include ‘mathematical advances’ as science. This means that from 1 April 2023, you can claim a proportion of costs relating to pure maths activities – great news for  companies doing R&D in quantum computing, deeptech and more.

No overseas R&D

Subcontracted spend from outside the UK will no longer be eligible for inclusion in R&D claims. The aim of this is to bring more R&D activity to the UK and incentivise companies to move operations into the UK.

You must make your R&D claim online

It’s not just the qualifying costs that are changing. HMRC has also updated the way you need to submit your R&D claim for accounting periods starting on or after 1 April 2023:

• Submit the claim online alongside your Corporation Tax return (not by email or post)
• Include a summary of the cost categories included in the claim
  You’ll need to include a brief description of qualifying R&D activities. When you claim with SeedLegals, we already guide you to do this.
• Name a senior officer of the company responsible for your R&D claim
  For example, one of the directors.
• Include details of any advisor you used to help with your claim

For full details about the information you’ll need to include, read the guidance at the HMRC website.

You must notify HMRC in advance

For accounting periods starting on or after 1 April 2023, HMRC has added a new requirement that you must notify them before you make a claim.

You’ll need to fill in an online form to notify HMRC that you intend to make a claim within six months from the end of the accounting period which your claim covers.

This requirement doesn’t apply if you made a claim in one of the three previous accounting periods.

To check if you need to notify HMRC in advance and how to send your notifications, read the detailed guidance at the HMRC website.

Relief rates for the SME scheme are decreasing

The SME R&D scheme benefit for loss-making companies decreased from a maximum of 33% cash back to 18.6%.

• The enhanced deduction rate will be reduced from 130% to 86%
• The ‘surrender’ rate of 14.5% will be decreased to 10%, meaning that the maximum tax benefit for loss-making companies will be 18.6%
• Before the changes, the benefit for loss-making SMEs was worth 33p for every £1 of R&D spend
• When changes come into effect, the benefit for loss-making SMEs will be worth 18.6p for every £1 of R&D spend
• Profit-making SMEs can expect to receive up to 16.34p for every £1 spent on R&D

Relief rates for the RDEC scheme are increasing

The RDEC rate increased from 13% to 20%. That means that the overall tax benefit from the RDEC scheme increased from 10.54% to 16.2%.

• Before the increase in Corporation Tax, RDEC claims were worth 10.53p for every £1 spend on R&D
• From April 2023, RDEC claims relating to accounting periods beginning on or after 1 April 2023 are worth 9.75p for every £1 spent on R&D

How Corporation Tax rate changes affect R&D claims

In 2021, the government announced a rise to Corporation Tax which came into effect on 1 April 2023.

The rate rise hit profit-making companies hardest and makes calculating their tax rate more complicated:

• Profit up to £50,000 – continue to pay 19% Corporation Tax
• Profit over £250,000 – pay an increased rate of 25%
• Profit £50,000 to £250,000 – pay the 25% rate but can also claim ‘marginal rate relief’ to reduce the rate to 19 to 25%

For companies making a profit:

• Claiming R&D relief under the SME scheme – the increased Corporation Tax rate means you’ll get a higher rate of tax relief
• Claiming R&D relief under the RDEC scheme – the overall benefit will decrease because RDEC is an ‘above the line’ credit which means it’s taxable at the Corporation Tax rate.

Talk to the R&D experts

Not sure how these changes affect your business? Need some help with your claim? Book a free call with our R&D experts.