R&D CHANGES SPRING 2023

Changes to R&D tax relief were confirmed in the Spring Budget which took place on 15 March 2023. The changes relate to both the SME scheme and the RDEC scheme which apply to smaller (SME) and larger (RDEC) companies respectively.

Whilst some of the changes will come into force from 1 April 2023; many will follow later on.

We have set out below a summary of all the changes you need to be aware of should you be eligible to make a claim for R&D both in terms of a reminder of those changes previously announced and the most recent changes.

Changes to rates of relief for R&D

For expenditure from 1st April 2023, the additional deduction for SMEs will decrease from 130% to 86% and the SME credit rate will reduce from 14.5% to 10%, except for loss-making SMEs that are R&D intensive, in respect of which an increase has been confirmed.

A company is R&D intensive if it spends at least 40% of it’s total expenditure on R&D. For these companies the rate of tax credit will be 14.5% in comparison to 10% which applies to all other claimant companies. This new rate will apply to expenditure incurred on or after 1 April 2023. However, we are yet to see the legislation to support this change.

This therefore means that if your company is R&D intensive, you will need to either: a. Claim at the 10% rate and amend the company tax return once legislation is in place, or b. Wait to submit claims

The government has published a technical note setting out how this measure works in greater detail.

Draft legislation will be published for technical consultation in Summer 2023.

For expenditure from 1st April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.

Arjan Singh Assistant Tax Manager arjan.singh@etctax.co.uk

A reminder of other changes announced in last year’s Autumn Budget.

In last year’s Autumn Budget, HMRC announced a number of changes designed to combat R&D fraud and ensure that there are less errors in R&D claims generally. These are highlighted below.

1) Claims to be submitted digitally

Companies will have to submit their R&D claims online using HMRC’s digital service, which is designed to make it easier for HMRC to review information and conduct risk assessments. A Government gateway or agent services account will be required to log in to and access the service.

2) Claims must include additional information

All claims must include additional information to support claims, such as a breakdown of the types of R&D expenditure – see below.

3) Claims must be supported by a named officer of the company

All claims will need to be supported by a named officer of the company. This is designed to protect against unauthorised claims being taken in the business’s name.

4) Claims must include details of any agents

Each R&D claim will need to include details of any agents associated with the submission. This will include ‘main’ agents and ‘secondary’ agents where more than one agent acts for the client. This could pose a practical problem where more than one agent is involved in the ‘chain’ and we are yet to fully understand how this will work. The point here is that HMRC will be able to more easily spot agents with a track record of submitting spurious claims.

5) Some claimants must submit a pre-notification of their claim

New rules require those claiming R&D relief for the first-time or those who have not claimed in the last three accounting periods to submit a pre-notification of their claim to HMRC online. This gives HMRC the opportunity to take proactive steps to educate companies on R&D processes.

The latest date that a claim notification form must be submitted is 6 months after the end of the period of account that the claim relates to.

If the form is not submitted by this deadline, the claim will not be valid.

To complete the claim notification form companies will need the following details:

• the company’s Unique Taxpayer Reference (UTR), this must match the one shown in your Company Tax Return

• details of the main (senior) internal R&D contact in the company who is responsible for the R&D claim, for example a company director

• the contact details of any agent involved in the R&D claim

• the accounting period start and end date for which you’re claiming the tax relief or expenditure credit, this must match the one shown in your Company Tax Return

• the period of account start and end date

To discuss how ETC can help with your tax questions call the team on 0161 711 1320 or email enquiries@etctax.co.uk

• a summary of the high-level planned activities, for example if software has been developed details of what that software will be used for to show that the project meets the standard definition of R&D — you do not need to include evidence on the form, but you will need to provide further information on the additional information form

6) Expanded categories of qualifying expenditure

Qualifying expenditure is also being reformed to include licence payments for datasets and data analytics and cloud computing costs. Further information form

Whilst we already knew that additional information in support of R&D claims would be required as this was announced in 2022 it has now been confirmed that this will be required for all claims submitted on or after 1st August 2023 and not after 1st April 2023 as originally expected.

This was perhaps one of the largest changes to emerge and one which will impact thousands of claims.

Companies will need to send HMRC an additional information form before submitting their Corporation Tax Return. If this is not done, HMRC will write to confirm that they have removed the claim for R&D tax relief from the company tax return.

For claims submitted before 1 August 2023 companies can choose to give HMRC more information which may reduce enquiries about claims.

In order to submit this form, further details will be needed, such as but not limited to:

• Company details

• Contact details of the main R&D contact e.g. company director and any agent involved

• Qualifying expenditure details

• Project details

Again, we are yet to see further legislation to support this and again this is expected to be published in the Summer of 2023.

Overseas expenditure rules

Planned restrictions to overseas expenditure qualifying for R&D will prevent companies from claiming overseas R&D costs.

Quite surprisingly, however, these restrictions have been delayed until 1 April 2024. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief which has been consulted on recently.

Time limit for R&D claims

The legislation sets out a requirement for companies to make their R&D tax relief claims within two years of the end of the period of account on which the return is based unless the period of account is longer than 18 months, in which case the time limit is 42 months from the start of the period.

This has changed from 12 months from the statutory filing date. The change here arises from companies who did not receive a notice to file, either because they failed to register or notify HMRC that they are dormant, who then benefitted by having more time to make a claim.

Merging of the RDEC and SME schemes

The government’s consultation on merging the RDEC and SME schemes closed on 13 March 2023. They are currently considering responses to this, and no decision has yet been made. The option of a merged scheme is still open to implementation from April 2024.

Should it be agreed, the government will publish draft legislation on a merged scheme for technical consultation in Summer 2023, with a summary of responses to the consultation. Any final decision on whether to merge the RDEC and SME schemes will be announced at a future fiscal event.

Other changes

Where the current and new legislation produces any anomalous results, we can be sure to see further changes to the R&D regime as legislation will be corrected. In that event, ETC Tax will provide further updates.

Next steps

If you have any questions with regards to the changes to the R&D rules, or R&D in general, please do not hesitate to get in touch with our tax experts today. We would be happy to assist with your claim.