R&D tax credits: The ultimate guide for 2023
How do R&D tax credits work? Are you missing out on tax relief? Find out how to claim back up to 33% of your R&D spend.
On 20 July 2022, the UK Government published changes to the existing R&D Tax Credits scheme to refocus on UK-based innovation and to tackle fraudulent claims.
The measures are draft legislation – it isn’t yet law but we expect the changes will apply to claims for accounting periods beginning on or after 1 April 2023.
At SeedLegals, we’re experts in R&D claims – we help startups claim cash or tax credits worth up to 33% of their R&D spend. We take part in HMRC’s Research & Development Communication Forum (RDCF) where we champion the interests of UK startups and contribute to discussions on policy.
The draft legislation covers both R&D Tax Relief schemes: R&D Expenditure Credit (RDEC) for larger businesses, and R&D relief for small or medium enterprises (SME). In this post, we explain how the changes affect UK startups.
We expect the changes below will apply to claims for accounting periods beginning on or after 1 April 2023.
Consumables and software are already included in the definition of ‘qualifying expenditure’ – the Government will extend the definition to include the costs of your cloud system and datasets, including storage and hosting.
At SeedLegals, we’re delighted to see this update to the R&D claims rules – if you’re an innovative startup, more of your software costs will qualify.
Pure maths will now be allowed under the definition of R&D for tax relief. This is great news if you’re using pure maths – for example, if your startup works with AI, quantum computing, risk analysis or algorithms – you can now include these costs in your R&D claim.
The Government wants to refocus R&D tax relief towards innovation undertaken in the UK so your R&D spend must either be UK expenditure or qualifying overseas expenditure. You’ll have to show that any ‘overseas’ expenditure is necessary because in the UK we don’t have or you can’t replicate the right geographical, environmental or social conditions. For example, if your startup is involved in deep ocean research or you’re carrying out clinical trials which can only be done in a particular area outside the UK.
In the draft legislation, HMRC have confirmed that if you can’t find the workers you need in the UK and you have to contract overseas workers or an overseas company, you won’t be able to include these costs in your R&D claim. The exception to this is if the activity your workers are doing outside the UK is a permitted R&D activity.
To tackle fraudulent claims, all claims must be made digitally.
Companies exempt from doing an online company tax return will be exempt from this rule.
If you plan to make a claim, you’ll need to inform HMRC in advance. There will be a digital service to do this, and you’ll need to let them know within six months of the end of the period for which you’ll be making the claim.
You won’t need to notify HMRC if you’ve already claimed in one of the previous three accounting periods.
Even if you’re not sure if you’ll go ahead to make a claim, it’s worth notifying HMRC in advance. There won’t be a penalty if you decide not to claim.
These measures are designed to improve compliance and tackle fraudulent claims:
R&D claims can include the National Insurance you pay your staff. The claim rules have been updated to include the new Health and Social Care Levy on National Insurance.
At SeedLegals, we welcome these changes to R&D tax relief which will modernise the schemes to make them more fair and appropriate for innovative UK startups.
In this post, we’ve covered the changes most likely to affect small businesses – there are other changes to the R&D tax relief rules that affect larger companies, companies that are part of a group, and incorrect claims. To read about the changes to the schemes in full, read the Government’s policy paper.
The draft legislation isn’t yet signed off – it’s possible the changes will be amended or added to before they’re incorporated into law.
Want to maximise your R&D claim and make sure it’s accepted first time? Read our ultimate guide to R&D Tax Credits and book a call with our expert team to find out how we can help.
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