R&D tax credits are changing from April 2023 – find out how it could affect your business

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

While that will continue to be the case, from April 2023, there’ll be changes to the cost categories and rate changes for both the SME and RDEC schemes. If you work in a data-intensive industry it could be good news for you.

How are qualifying cost categories changing?

There are 5 cost categories for R&D:

• Staffing costs (payroll)
• Subcontracted costs (SME only, cannot be included in RDEC – unless a qualifying body)
• Expenditure on externally provided workers (e.g., agency workers)
• Consumables (e.g., raw materials used during R&D or utilities)
• Software costs (e.g., CAD, CAM, Atlassian)

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

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.

Cloud costs will now be eligible

Currently, costs relating to cloud-based technology can’t be included in an R&D claim.

From April 2023, cloud-based computing costs such as AWS will be eligible for inclusion. This is very good news for companies who develop technology using cloud-based means.

Pure maths will also be eligible

Currently, activities which relate to pure mathematics aren’t not eligible for inclusion in R&D claims.

From April, companies will be able to claim a proportion of costs relating to pure maths activities, meaning companies whose R&D relates to quantum computing or deeptech will benefit.

You must make your R&D claim online

It’s not just the scheme criteria that’s changing. HMRC will also update the way you need to submit your R&D claim from April 2023. Although not confirmed yet, here’s a breakdown of what we expect:

• The claim must be submitted digitally alongside your corporation tax return (not by email or post)
• The claim must include a summary of the cost categories included in the claim
  A brief description of qualifying R&D activities must be included with the submission (this is something that we currently guide companies to do using our platform)
• The claim must be signed by a named senior officer of the company – this could be a director
• You’ll need to include details of any advisor you’ve used to help you with your claim
• You must pre-notify HMRC of a claim you intend to make within 6 months from the end of the financial period to which the claim relates (unless a claim has been made in one of the prior 3 financial periods)

What are the rate changes to SME scheme?

The government announced rate changes to the R&D schemes in the Autumn Statement.

The SME R&D scheme benefit for loss-making companies will decrease 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

What are the rate changes to RDEC scheme?

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

• Before the increase in corporation tax, RDEC claims will be worth 10.53p for every £1 spend on R&D
• When changes come into effect from April 2023, RDEC claims relating to accounting periods beginning on or after 01 April 2023 will be worth 9.75p for every £1 spent on R&D

The corporation tax rate rise will affect R&D claims

In 2021, the government announced a new corporate tax rate rise which will come into effect on 1 April 2023.

The rate rise will hit profit-making companies hardest and make calculating their tax rate more complex:

• Companies making profit up to £50,000 will have continued to pay 19% corporation tax
• Companies making over £250,000 profit will pay a new increased main rate of 25%
  Companies making profit between £50,000 and £250,000 will pay the 25% rate but will also be able to claim a ‘marginal rate relief’ which will result in a reduction in rate between 19-25%
• This increase will mean that profit making companies claiming under the SME scheme will receive a higher rate of relief
• Companies claiming under the RDEC scheme will see the overall value of their benefit decrease because RDEC is an ‘above the line’ credit, which means that it’s taxable at the corporation tax rate

Talk to the R&D experts

You can speak to us if you’d like to discuss how the changes affect your circumstances. Book a free call with our R&D experts.