2023 marks significant changes to R&D tax relief schemes.
In response to rising numbers of false and fraudulent claims, HMRC has clamped down on abuse of the SME scheme, reducing its benefits in the process.
Meanwhile, the RDEC scheme, designed for larger businesses, has received a slight boost.
These changes coincide with this year’s corporation tax rise from 19% to 25% and the Government is launching a consultation to merge the two existing schemes in the coming year.
Here’s a breakdown of 2023’s R&D changes for your business.
Amendments to R&D tax relief
With effect from 1 April 2023, HMRC transformed the tax relief rates under both the Research and Development Expenditure Credit (RDEC) and Small and Medium Enterprises (SME) schemes.
These changes impact both large businesses and SMEs claiming R&D tax credits. Any and all businesses claiming – or planning to claim – R&D tax credits should take notice of the new rules, as the impacts are significant for smaller businesses.
Here’s a breakdown of the main alterations and how they change tax relief rates.
Breakdown of changes in RDEC and SME schemes
Under the RDEC scheme for larger companies, the tax credit rate has been boosted, increasing from 13% to 20%.
On the other hand, businesses utilising the SME scheme, intended for smaller companies, will see reductions. Here, the enhancement rate has dropped from 130% to 86%, representing a significant decrease in the tax relief available. The SME tax credit rate has also dropped from 14.5% to 10%.
In essence, these changes negatively affect smaller companies under the SME scheme and positively affect larger companies under the RDEC scheme. As mentioned, these changes combine with the increased corporate tax rate, which has risen from 19% to 25%.
The implications for profitable and loss-making companies
Changes to R&D tax relief rates have varying impacts on businesses based on their profitability status. The implications of the changes for SMEs are worst felt by loss-making companies.
Profitable companies will notice a decrease in tax savings under the SME scheme.
Before the amendments, companies would have earned a 24.7% additional tax saving on qualifying expenditures using the former 130% enhancement rate and the 19% corporation tax rate. With this year’s changes, savings have dipped to 21.5%, calculated with the reduced 86% enhancement and the new 25% corporation tax rate.
On the flip side, profitable companies claiming under the RDEC scheme will observe an increase in their tax relief.
When accounting for the new R&D relief rates and corporate tax rate, RDEC tax relief has increased from 10.53% to 15% on qualifying expenditures.
The impact on loss-making companies has also changed.
For the SME scheme, the tax credit on qualifying expenditure has dropped substantially, from 33.35% to 18.6%.
Conversely, under the RDEC scheme, the tax credit for loss-making companies has generally increased from 10.53% to 15%.
Other changes to R&D relief
Cloud computing and pure mathematics
There are some additional changes to which businesses qualify for R&D tax relief.
From 1 April 2023, the scope of qualifying R&D expenditure broadens to include data and cloud computing costs.
Moreover, projects centred around pure mathematics, which were previously excluded, will now qualify for R&D tax relief.
Pre-notification and supporting information
HMRC now requires companies making their first R&D claim or those which have yet to claim in the previous three accounting periods to notify them within six months of the end of the related accounting period.
From 1 August 2023, all R&D claims must be submitted digitally. Each claim must provide a detailed cost breakdown across qualifying expenditure categories and a summary of the R&D activities undertaken.
A senior company officer should endorse the claim and include details of any advising agent.
Revised rules for overseas expenditure
Beginning 1 April 2024, most overseas expenditures on subcontractors and externally provided workers will no longer qualify, barring a few exceptions.
What this means for your business
R&D tax relief could have significant implications for your business. This isn’t great news for SMEs, whereas larger businesses claiming under the RDEC scheme will benefit.
Navigating these changes can be complex – seeking expert advice to maximise your R&D tax relief claim and comply with the new rules is crucial.
Talk to us to find out more.