In the Chancellor’s Spring 2023 Budget , Jeremy Hunt confirmed changes to the two Research and Development (R&D) schemes currently in operation.
These changes came into effect from 1 April 2023 and are being brought in to help tackle a significant amount of fraud being perpetrated through the R&D schemes, particularly the scheme for SME’s.
What is R&D relief?
So, what is R&D relief? This is a tax relief available in the UK for business which invest in qualifying R&D activities. The scheme is designed to encourage investment in R&D and help ensure UK businesses are at the forefront of global technological advancements.
There are two scheme currently available:
- SME R&D tax relief scheme
- R&D Expenditure Credit (RDEC) scheme
Both schemes work in a similar way in that you claim for enhanced tax relief on qualifying expenditure, directly relating to projects which seek to advance scientific or technological understanding in the respective field.
The advancement could be something completely new or it might be using existing technology in a completely new way. Companies can claim for projects seeking an advancement even if it ended up not working out, as it still advances understanding in what does not work.
RDEC for expenditure
The RDEC scheme is available to all companies and allows companies to claim a tax credit of 20% of the qualifying expenditure incurred after 1 April 2023. For accounting periods before this date, the rate was 13%.
This credit is then available to relieve corporation tax liabilities. If there is unused credit left after clearing the current year corporation tax, there is a calculation to perform to see how much of this can then be used to relieve corporation tax liabilities from other accounting periods for the company or other companies in the group. Any remaining balance can then be used to discharge any other tax liabilities such as VAT.
Currently SME’s would only use this scheme in certain circumstances, due to the availability of the SME R&D scheme
For example, where the SME is subcontracted to undertake the R&D work by a larger company or where other government grants have been received for the project.
SME R&D relief
The SME scheme allows qualifying companies to claim tax relief at 186% on qualifying expenditure incurred after 1 April 2023.
The relief was 230% for expenditure incurred before 31 March 2023. So, a bit of a drop!
This will normally be largely made up of costs like:
- staff costs, including employers’ national insurance and pension contributions.
- material costs, an element of subcontracted fees, software and power costs.
Who qualifies for SME R&D relief?
You can make an R&D claim if your company:
- Employs less than 500 staff; and
- Turnover is less than €100 million; or
- Balance sheet total of under €86 million
If the company is part of a group or corporate shareholders with more than 25% an element of their staff, turnover and balances will need to be included in the calculations for these thresholds.
How does the SME R&D Credit work?
If the SME R&D relief claim creates a tax loss, the company can opt to surrender the loss for a credit of 10%, for claims relating to expenditure made after 1 April 2023. The SME R&D credit for period before 31 March 2023 was 14.5%. Once the loss is surrendered it will not be available to carry forward against future profits.
There is a cap on how much credit a company can claim under this scheme which is £20,000 plus three times the total PAYE and NIC liability of the company for the year. This cap has been in place for a little while now and as, in most cases, the majority of the claim is made up of employee costs, in most cases this tends not to be a problem.
To ensure you use the relief most effectively, before claiming the R&D credit, you should consider using the loss against any taxable profits either in the previous year or against expected profits in future years.
Overseas expenditure changes
In the autumn statement 2022, plans to eliminate overseas expenditure from qualifying for the two R&D schemes were announced. Although this was due to come in sooner, in the 2023 spring budget this was delayed to 1 April 2024.
This means that where work is being undertaken outside of the UK, either by overseas staff or overseas contractors, from 1 April 2024 these costs will no longer qualify.
How to make a Claim?
One of the biggest changes to both schemes is that companies wishing to make an R&D claim, for the first time, are now required to make electronic notifications to HMRC no later than 6 months after the accounting period end.
If the notification is not made the company will not be able to make a claim for that period! So, this makes it important that you are in constant conversation with your Accountant and any claims are made promptly.
Details of how this claim will be made and how much detail required in this notification, is still to be announced. However, it is likely that basic information relating to the amount of expenditure and about the project is likely to be included.
Companies will then need to make the claim within the tax return as they currently do now. From April 2023 companies will also be required to submit an electronic form fully explaining the project and claim. This form will also include the name of the person within the company who is taking responsibility for the claim and details of any agent who has helped in preparing the claim.
This will be in addition to the report we would recommend companies file with claims now.
Why are they doing this?
Over the last few year’s HMRC have detected and significant increase in fraudulent claims being made under both schemes but especially for SME’s.
The long-term plan is to merge the two schemes with unified regime likely to follow the RDEC scheme but in the meantime, we saw reduction in rates.
When the new unified scheme is launched the impact on SME’s will have been lessen as the bulk of the reduction in relief for SME’s has been brought in with the changes from 1 April 2023.
The government in currently working on responses to a consultation which ended in March 2023, and they are hoping the new scheme will come into operation from 1 April 2024.
Many businesses could be entitled to R&D claims. It is a complex affair, and you must know the rules. That’s where we come in. We have extensive experience when it comes to making the claims with HM Revenue and Customs and we’re here to help you.
Please contact our expert Ian Meaburn at email@example.com who will be happy to help.