Original content provided by BDO United Kingdom
Now updated following HMRC’s new guidance on the Additional Information Form, the definition of pure maths and the advance claim notification requirement (which will affect many more businesses than initially expected).
Research & Development (R&D) tax relief can provide valuable financial support if you are a business that is investing in innovation and developing new processes, products or services. Understanding exactly how the R&D tax relief regimes work after changes come into force in April 2023 and April 2024 may be of critical importance to your financial projections.
Why is the R&D tax relief regime changing?
The government has a target to raise investment in R&D to 2.4% of UK GDP by 2027. R&D tax relief contributes to that goal by reducing the cost of innovation for UK companies and the Government wants to make it more effective to increase “additionality” – the extra R&D spend that companies claiming the relief make. It is also introducing changes to the claims process in order to tackle errors and suspected abuse of the R&D tax relief regime.
As well as the immediate changes highlighted below, the Government is proposing to combine the existing SME scheme and R&D Expenditure Credit (RDEC) rules into one unified regime (based on the current RDEC template) from April 2024. The government’s consultation on this merged scheme closed on 13 March 2023 and is currently considering the responses - no decision has been made. The government intends to keep open the option of implementing a merged scheme from April 2024. Draft legislation on this is expected in summer 2023.
R&D tax relief rates 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 be as follows:
**Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% of total expenditure. Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and by subtracting any amount not deductible for CT purposes.
The repayable credit available under both the SME and RDEC schemes is capped – although the cap is calculated in distinct ways. Read more on the SME cap.
Many R&D costs can be claimed when they are incurred but 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, if it doesn’t materially impact your claims.
Technical changes to the R&D tax relief regime
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 and 1 April 2024 in certain cases.
Timing example
ABC 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 ABC 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.
ABC Limited will not be able to claim for its cloud computing costs for the period 1 April 2023 to 30 September 2023. By comparison, ABC Limited will be able to claim for its cloud computing costs for the year ended 30 September 2024.
Changes to R&D tax relief claim process
Making successful R&D tax relief claims
The process of making an R&D tax claim can be complicated but there are some simple things you can do to improve the accuracy and the effectiveness of your R&D claims. Follow some basic best practice advice, get expert advice and consider using our R&D tax claim tool to calculate and risk assess your claim.