This year has seen a number of changes to the rules regarding R&D tax relief, with a raft of measures introduced in April, then further revisions and new guidelines arising from the Chancellor’s Autumn Statement in November.
The key changes introduced from April were:
SME R&D tax relief and R&D expenditure credit rate changes
For expenditure incurred from April 1, 2023, the SME R&D tax relief (SME) enhanced deduction rate reduced from 130% to 86% and the SME payable credit rate decreased from 14.5% to 10%.
Conversely, the R&D expenditure credit (RDEC) scheme, under which a large company or an SME conducting subsidised R&D may claim, increased from 13% to 20%.
As part of Finance Bill 2023-24, there is a higher rate of payable tax credit for loss-making R&D intensive SMEs (a company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure). Eligible companies can claim a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.
For accounting periods beginning on or after April 1, 2023, companies that are planning to claim R&D tax relief or expenditure credit must submit a claim notification form if they are claiming for the first time or if their last claim was made more than three years before the last date of the claim notification period.
Data licence and cloud computing
Qualifying expenditure was extended to include the relevant elements of data licence costs and cloud computing costs.
A data licence is a licence to access and use a collection of digital data.
Cloud computing includes: data storage, hardware facilities, operating systems and software platforms.
Extending the scope of R&D relief to cover mathematical advances
The definition of R&D for tax reliefs will be expanded to include all mathematics – clarifying in particular that ‘pure maths’ can qualify.
From August 2023, as part of the work to tackle abuse and improve compliance, there has been a mandatory requirement to submit an Additional Information Form ahead of the R&D claim submission, this includes:
- A description of the R&D
- A breakdown of costs across qualifying categories
- The name of any agent or advisor who has helped to prepare the claim
- Claim endorsement by a named senior officer of the company
What to expect in 2024
In his autumn statement, the Chancellor confirmed that the existing Research and Development Expenditure (RDEC) and SME tax relief schemes will be merged in respect of accounting periods beginning on or after April 1, 2024. The main purpose of the merger is to simplify and improve the UK’s R&D tax relief system. Under the current regimes, current RDEC claimants benefit from a rate in- crease, whilst for SME claimants the rate will reduce.
The Chancellor also confirmed that the notional tax rate applied to loss-makers under the merged scheme would be reduced from 25% (the existing RDEC scheme) to 19%.
Prior to the Autumn Finance Bill 2023, a technical policy note on specific provisions of the new scheme has been published alongside the Autumn Statement. This includes further detail on contracted out R&D, subsidised expenditure and externally provided workers. Overall, this suggests a number of improvements to the earlier draft legislation, and we eagerly await the specifics.
Further expenditure adjustment for R&D intensive loss-making SMEs
The SME intensive scheme, for the most R&D intensive loss-making SMEs, was announced in the Spring Budget 2023 for R&D expenditure from April 1, 2023.
The Chancellor announced that for accounting periods beginning on or after April 1, 2024, the intensity threshold will be reduced from 40% to 30%, bringing approximately 5,000 more R&D intensive SMEs into scope of the relief. The government will also introduce a one-year grace period, so that companies that dip under the 30% qualifying R&D expenditure threshold will continue to receive relief for one year.
Businesses will be able to claim for expenditure incurred from April 1, 2023 once the Autumn Finance Bill 2023 has received Royal Assent, with the reduction in intensity threshold and grace period coming into effect for accounting periods beginning on or after April 1, 2024.
From April 1, 2024, R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments. This means that in most circumstances payments of R&D tax reliefs will be paid directly to the company that claims for the R&D, ensuring they have full oversight of the claim, and receive payment more quickly. This will be legislated in the Autumn Finance Bill 2023.
Following earlier consultation between HMRC and ACCA, Ad Valorem expected the return of a minimum expenditure threshold for R&D claims. HMRC’s view that the level of non-compliance is significantly increased across smaller, low value claims, suggests that this may be raised in the future.