There have been major tax incentives for research and development expenditure for many years. Until recently, HMRC has adopted a ‘light touch’ approach to compliance in this area. However, those days are now over, as Finance Act 2023 introduces a number of changes, including more onerous compliance rules. The main changes are outlined below.
The legislation will apply generally to accounting periods starting on or after 1 April 2023, except for the requirement to provide additional information, which will apply to all claims made on or after 1 August 2023.
New categories of qualifying expenditure
There are three new categories of qualifying expenditure for R&D tax relief, namely:
- Data licences and cloud computing services; a data licence is defined as one to access and use a collection of data services.
- Cloud computing services, which include providing access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities.
- Pure mathematics (previously a specifically excluded category); the types of companies that will benefit from this are wide-ranging, from software companies, especially those working in the areas of cybersecurity and crypto currencies, through to insurance companies and engineering firms.
Notification of intention to claim
Companies are mandated to inform HMRC of their intention to make a claim for R&D tax relief using a new digital form, within 6 months of the end of the AP in which the expenditure is incurred.
This measure is intended to allow HMRC to perform more upfront compliance checks on new claimants, so companies that have claimed R&D tax relief in any of the previous three years will be exempted from this requirement.
Claim must include specified information
A new provision is introduced which specifies that any claim must include specified information. The claim must be completed by a representative of the company or an agent acting on behalf of the company and will include:
- Company details, including unique tax reference (UTR), PAYE reference number, VAT registration number and business type;
- Contact details of main senior internal R&D contact who is responsible for the claim and the agent involved in the claim;
- Accounting period for which relief is claimed;
- Full details of qualifying expenditure;
- Amount of qualifying expenditure, for each project, of qualifying indirect activities;
- Project details including
- What is the main field of science and technology?
- What was the baseline level of science or technology that the company planned to advance?
- What advance did the company aim to achieve?
- The scientific or technological uncertainty that the company faced.
- How the project sought to overcome the uncertainty.
- Which tax relief is being claimed and the amount
Restriction to UK expenditure
The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. 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, e.g. deep ocean research; or
- legal or regulatory requirements, e.g. clinical trials.
Reduction in tax relief
Most small and medium-sized companies incurring qualifying R&D expenditure get tax relief via the ‘enhanced deduction’ scheme, under which expenditure is deemed to be increased for tax purposes, thus giving a greater deduction than the actual amount spent. Where this deduction creates a tax loss, the loss can be surrendered to HMRC in exchange for a ‘payable tax credit’.
Previous legislation had already reduced this tax relief for expenditure incurred on or after 1 April 2023, as follows:
- The additional deduction decreased from 130% to 86%; and
- the payable credit rate decreased from 14.5% to 10%.
For a loss-making company with, say, £20,000 of qualifying R&D expenditure, the payable tax credit will reduce from £6,670 to £3,720. So, as you can see, these changes may be very significant for some R&D businesses.
At the Budget in March, the Chancellor announced that a new credit rate will be available to ‘R&D intensive companies’, i.e. loss-making companies where R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure, instead of the new 10% credit rate under the existing SME scheme.
Further changes ahead
Large companies have a completely different scheme to encourage R&D expenditure, called the RDEC (Research and Development Expenditure Credit). A minority of small and medium companies also have to use this relief, for example if their R&D is grant-aided.
The government has announced that it intends to move all companies to an RDEC-type system of R&D relief in the future, although whether this will be formalised before the upcoming General Election is not yet clear.
If your company incurs qualifying R&D, please make sure you understand the implications of all these changes and speak to us if you need help in navigating this new, more onerous compliance regime. We don’t want you to miss out on valuable tax relief.