In the first of a series of three articles on R&D, James discusses recent changes to the reliefs.
A number of changes to the R&D rules apply from April 2023 onwards, as well as some future changes announced, and these are summarised here in relation to the two schemes. The SME (small and medium sized entity) scheme is the (historically) more generous scheme. The R&D Expenditure Credit (RDEC) scheme applies to larger companies, but also applies to SMEs where the R&D is subsidised, subcontracted, or grant funded.
The current changes decrease the generosity of the SME scheme but increase the relief for the RDEC scheme. This is largely in response to a significant amount of error and fraud in the SME scheme which has not been well policed by HMRC in the past.
Longer term, the government has indicated that the two schemes are likely to be merged into a new single scheme in April 2024. This is why the relief rates for the two existing schemes are converging.
Headline changes (apply to costs incurred from April 2023 onwards unless otherwise stated):
- Enhanced SME deduction from profit decreased from 130% to 86% of R&D costs – reducing benefit by about a third.
- Tax credit payment for SMEs surrendering R&D losses decreased from 14.5% to 10% – reducing benefit by about a third again.
- R&D intensive companies (more than 40% of operating costs are qualifying R&D) can retain the old 14.5% tax credit rate.
- Exclusion of overseas subcontractor costs – effective April 2024.
- RDEC relief rate increases from 13% to 20%.
The reduction is therefore significant for early stage companies not yet making profit, as they get the “double whammy” which reduces the value of the R&D relief by up to 52%.
Positive changes include the expansion of relief to include costs of data and cloud computing, and R&D on pure mathematics.
There are also a number of administrative changes. Some are minor, such as the requirement for an officer of the company to put their name on the claim, as well as the R&D adviser.
However a major change is the introduction of a new digital “Additional Information” form which needs to be submitted for all claims filed from August 2023 onwards, in addition to the Corporation Tax Return.
This will require companies to prepare their claims in a very different way than they will be used to, as well as to allocate their R&D costs to specific projects (rather than just to R&D as a whole). This will be explored in a later article in the series. However we would of course be pleased to discuss this in more detail if anyone requires a more immediate understanding.
The next article in this series will explain the current HMRC enquiry activity that is taking place, and the third and final one will explore how claims are now required to be collated.