Posted by James Pearson on 24 Nov 2022
Big Changes For R&D Relief
The Chancellor’s Autumn Statement announced sweeping changes to the rates of R&D relief available from 1 April 2023, on top of the previously announced changes. These rate changes greatly reduce the relief available for smaller companies but increase the relief available for large companies.
The RDEC (Research & Development Expenditure Credit) rate is increasing from 13% to 20% for qualifying R&D expenditure incurred from 1 April 2023. The RDEC is the ‘large company’ R&D relief scheme, which gives the RDEC as a taxable credit that is also deductible from the company’s tax liability and can be repaid to the company (less a notional tax charge at the main corporation tax rate) if the tax liability is lower.
For example, a company with no tax liability incurring £100k of qualifying R&D expenditure currently receives an RDEC of £13k, which suffers notional tax at 19%, resulting in a maximum payment to the company of £10,530. From 1 April 2023, the RDEC will increase to £20k, less a notional tax charge at the new main rate of 25%, resulting in a maximum payment to the company of £15,000. An increase of 42% in the RDEC relief.
At the same time the SME (Small and Medium-sized enterprise) scheme, which provides an additional tax deduction for qualifying R&D expenditure, is being pared back. The additional deduction for qualifying expenditure will reduce from 130% to 86% and the tax credit rate for R&D losses will go from 14.5% to 10% for qualifying R&D expenditure incurred from 1 April 2023.
Again, a company with no tax liability incurring £100k of qualifying R&D expenditure currently receives an additional deduction of £130k, and the combined £230k of R&D loss can be ‘cashed in’ at 14.5% for repayment to the company of £33,350, which is 214% more than the maximum RDEC repayment!
From 1 April 2023, the additional deduction will be reduced to £86k, and the combined £186k of R&D loss can be ‘cashed in’ at 10% for repayment to the company of £18,600. This will now only be 24% higher than the new maximum rate of RDEC repayment.
The SME scheme will still be more generous, but the gulf between the schemes is being greatly reduced.
Before the Autumn Statement, changes had already been enacted to reduce abuse of the R&D scheme for SMEs and to make the relief more UK-focussed:
- From April 2021, the tax credit payment available in exchange for R&D losses under the SME scheme would be restricted to £20,000 plus 3 times the total PAYE costs of staff members involved with R&D. The company still receives the 130% (86% from 1 April 2023) additional deduction as R&D relief, but any loss that can’t be turned into a tax credit will be carried forward to when the company makes profits, rather than receiving an immediate cash payment.
- From April 2023, costs in relation to pure mathematics and cloud computing costs will become qualifying for R&D purposes, in order to keep the R&D regime relevant to modern technology. Companies will also need to make more disclosure to HMRC with the R&D relief claim, making the claim process more onerous but more visible to HMRC.
- Also from April 2023, costs for subcontracted R&D work will only qualify if the work is carried out in the UK (aside from minimal exceptions) and costs for externally provided workers (EPWs) will only qualify if the workers are paid through a UK payroll, in order to keep the R&D UK-focussed.
HMRC is also increasing its scrutiny of R&D claims and penalties may be charged if errors are identified, making it crucial that claims are both correct and well-documented.
Contact us for advice on reviewing your claims, the impact of the new rules, and the timing of any R&D claims/expenditure in view of the upcoming change to the rate of relief.
If you would like any advice regarding the above article or would like to discuss other ways in which we could help you or your business, please contact us at 01962 856 990 or firstname.lastname@example.org
- Personal Tax Relief For Residential Mortgages
- UK Property Sales: Capital Gains Tax for Non-Residents
- Overseas Pension Changes 6 April 2017
- Non-Cash Employee Benefits
- Incorporation of Property Portfolio