R&D tax relief rates changes – how it works in practice

R&D tax relief rates changes – how it works in practice

R&D tax relief offers valuable financial support to businesses as they innovate, so understanding exactly how it works when rules for the available tax relief change may be of critical importance to your financial projections.

Tax relief rate changes from 1 April 2023

In the Autumn Statement, the government announced that the rates of R&D tax relief available on costs incurred from 1 April 2023 onwards would change as follows:

	SME regime		Large company regime (RDEC)
	Up to 31 March 2023	From 1 April 2023	Up to 31 March 2023	From 1 April 2023
Profitable company	130% uplift on costs = 24.7% net benefit	86% uplift on costs = 21.5% net benefit	Headline rate 13% = 10.5% post tax	Headline rate 20% = 15% post tax
Loss making company*	Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy	Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy	10.5% subsidy	15% subsidy

* The repayable credit available under both the SME and RDEC schemes is capped – although the cap is calculated in different ways. 

Here it is important to remember that while many R&D costs can be claimed when they are incurred, this does not always apply. For example, costs covering a period of time, such as employee bonuses, will need to be apportioned on the accruals basis.

If you don’t have a year end date of 31 March, you will also need to do a split period calculation for R&D costs to ensure you apply the correct rates of relief. In some cases, where apportioning costs is challenging, HMRC may accept a blended rate of relief for a period that straddles a rate change, as long as it doesn’t materially impact your claims.

Technical changes

In addition to the rate changes, a number of technical and administrative changes are on the way, but these apply for accounting periods starting on or after 1 April 2023. In brief, these will:

• Deny relief on costs of R&D work outsourced overseas (although there will be a few situations where such costs can still qualify)
• Prohibit relief on the costs of overseas workers engaged on R&D projects (whether they are engaged directly or indirectly by the claimant company)
• Require claimant companies to ensure that PAYE is being applied to payments made to external workers engaged through personal service companies and agencies
• Allow UK costs for purchasing data sets to use in R&D projects
• Allow external cloud computing costs incurred in R&D work
• Allow the costs of ‘pure maths’ R&D.

Again, there are practical considerations for claims where the company’s accounting date is not 31 March. For example, where R&D work is outsourced to overseas third parties, it may not be possible to finish the project before the end of your accounting year ending after 31 March 2023: so there will need to be an apportionment of costs on the accruals basis to establish what is and is not allowable. Similarly, there may be administrative planning points to consider: if an R&D project includes the purchase of data sets, is it necessary to purchase these before the start of your first accounting period after 1 April 2023?

Changes to the claim process

When making claims for accounting periods starting after 1 April 2023, the claim must contain a detailed report on the R&D project - including the name of the agent who has advised the company on compiling the claim. Each claim will have to be made digitally and signed by a named senior officer of the claimant company. Where a company is making its first R&D claim, it must notify HMRC in advance of its intention to do so.

Timing example

A Limited’s accounting year end is 30 September, it has several ongoing R&D projects, and qualifies as an SME. It is outsourcing some of its software development to a third party in India, and incurs cloud computing costs in running test routines for products and services in development.

The apportionments A Limited will have to do to compile its R&D claim for the accounting year to 30 September 2023 will at least include:

• Software development costs outsourced to India – these will be allowable for this accounting year based on the work actually done in the periods:
  • 1 October to 31 March – claim relief on 65% of costs, with 130% uplift
  • 1 April to 30 September - claim relief on 65% of costs, with 86% uplift

• UK direct costs for project – claim 100% of the amounts attributable to the qualifying R&D, and apportion before and after 31 March to apply 130% and 86% uplifts or, if consistent through the year, agree with HMRC that a blended uplift rate of 108% can be applied.  

A Limited will not be able to claim for its cloud computing costs for the period 1 April 2023 to 30 September 2023, and its claim for the following accounting year must also exclude an appropriate proportion for this period.

 

 

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