Changes to R&D relief

Significant changes apply to R&D tax relief from April 2023. There are administrative changes, changes to the cost categories, and rate changes for both the Small or Medium Enterprise (SME) and Research and Development Expenditure Credit (RDEC) schemes.

What are the changes to R&D qualifying costs?

The 5 cost categories (Staffing costs, Subcontracted costs, Expenditure on externally provided workers, Consumables and Software costs) will all remain in place, but from 1 April 2023 Cloud and Data costs and Pure Mathematics can also qualify.

Cloud and Data Costs

Previously, licence fees for data software and cloud-based technology could not be claimed as R&D expenses. However, you will be allowed to include these costs in your claim for accounting periods beginning on or after 1 April 2023 provided that they are directly linked to your R&D activities. This will benefit businesses that use cloud-based services and depend on data for their research.

Pure Maths

Pure mathematics-related tasks were previously ineligible for inclusion in R&D claims. Companies can now deduct a portion of the expenses associated with pure maths-related activities starting on 1 April 2023. Therefore, businesses engaged in R&D in deep technology, quantum computing, and other similar fields will benefit.

How do I make an R&D claim?

The qualifying expenses are not the only thing that has changed. The method for submitting your R&D claim has also been revised by HMRC for accounting periods beginning on or after 1 April 2023.

The R&D claims submission process changes include requirements that:

• Claims are to be made digitally.
• The categories of qualifying expenditure incurred are to be disclosed, and brief details must be provided of the R&D activities.
• Claims are to be endorsed by a named senior company officer.
• The details of any agent who has advised the company in making the claim must be included.

If a company is a new claimant or hasn’t filed a claim in the previous three accounting periods, they must also send a pre-notification of their claim to HMRC within six months of the end of the period to which the claim relates.

How are the R&D relief rates changing?

The new R&D programme will go into force on April 1, 2023, coinciding with an increase in the corporation tax rate. The following has been confirmed for expenditure on or after 1 April 2023:

• The RDEC rate increases from 13% to 20%.
• The SME additional deduction will decrease from 130% to 86%.
• The SME credit rate will remain at 14.5% for loss-making R&D intensive SMEs (where 40% of their expenditure is on R&D) but will be cut to 10% for other companies.

In practical terms the changes to R&D relief are as follows:

For Profitable SME

Expenditure incurred on or before 31 March 2023

• Additional deduction: 130%
• Corporation tax: 19%
• Benefit: 43.7p per £1 (calculated as 230% of qualifying expenditure attracting tax relief at 19%)

Expenditure incurred on or after 1 April 2023

• Additional deduction: 86%
• Corporation tax: 25%
• Benefit: 46.5p per £1 (calculated as 186% of qualifying expenditure attracting tax relief at 25%)
• Benefit could be as low as 35.34p if paying tax at 19%

For Loss-making SME

Expenditure incurred on or before 31 March 2023

• Additional deduction: 130%
• Repayable credit: 14.5%
• Benefit: 33.35p per £1 (based on surrender of losses up to 230% of qualifying expenditure for a repayable credit of 14.5%)

Expenditure incurred on or after 1 April 2023

• Additional deduction: 86%
• Repayable credit: 10%
• Benefit for most SMEs: 18.6p per £1 (based on surrender of losses up to 186% of qualifying expenditure for a repayable credit of 10%)
• Benefit for R&D intensive SMEs: 26.97p per £1 (based on surrender of losses up to 186% of qualifying expenditure for a repayable credit of 14.5%)

For Company claiming under RDEC

Expenditure incurred on or before 31 March 2023

• RDEC credit rate: 13%
• Corporation tax: 19%
• Benefit: 10.53p per £1 (based on 13% of qualifying expenditure taxed at 19%)

Expenditure incurred on or after 1 April 2023

• RDEC credit rate: 20%
• Corporation tax: 25%
• Benefit: 15p per £1 (based on 20% of qualifying expenditure taxed at 25%)

Here to help

If you are not sure how these changes will affect your business or if you need some help with your claim, please get in touch.