UK: Changes to R&D Tax Reliefs from 1 April 2023 and beyond
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Legal Director
UK
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Associate
UK
As an associate in the Corporate Tax team, I advise clients on a broad range of tax issues that affect them at different stages of the business life cycle.
From 1 April 2023, the R&D tax relief scheme will see some changes. Put simply, the reforms to the R&D scheme will increase the rate of tax credit for companies that claim under the R&D expenditure credit scheme (“RDEC”) and reduce the rates of tax relief available for small and medium enterprises (“SMEs”). The submissions process for R&D claims will also see some additional requirements.
For the government’s full policy paper on the incoming changes to R&D tax credits, see here.
A refresher: the current R&D tax relief scheme
The R&D tax relief scheme applies to expenditure by companies on research and development. There are two different tax relief schemes companies can claim under: (1) the SME scheme, available only to SMEs, and (2) the RDEC scheme, available to both larger companies and SMEs. RDEC is primarily aimed at larger companies but is claimed by SMEs in some cases. The RDEC is a credit that acts as a taxable receipt in calculating trading profits.
Currently, SMEs can claim an additional deduction equal to 130% of their qualifying revenue expenditure, meaning that for every £1 spent on qualifying R&D, they get a relief of 43.7p. Loss-making SMEs, who likely won’t benefit from the tax relief if they are unable to carry back losses, can claim a payable credit instead. With the current credit rate for the payable credit set at 14.5%, SMEs obtaining a payable credit receive a tax benefit of 33.35%.
Companies claiming relief under RDEC obtain 19p tax relief for every £1 of qualifying expenditure. Under RDEC, companies can also claim a taxable credit at the current rate of 13%, equating to a 10.53% tax benefit.
How the scheme will change
Coinciding with the increase in the corporation tax rate, the new R&D scheme will take effect from 1 April 2023. The government confirmed and announced that for expenditure on or after 1 April 2023:
- The RDEC rate increases from 13% to 20%.
- The SME additional deduction will decrease from 130% to 86%.
- The SME credit rate will remain at 14.5% for loss-making SMEs spending 40% of their expenditure on R&D but will be cut to 10% for other companies.
Practically speaking, the changes to R&D relief are as follows:
| Expenditure incurred on or before 31 March 2023 | Expenditure incurred on or after 1 April 2023 | |
| Profitable SME | Additional deduction: 130% Corporation tax: 19% Benefit: 43.7p per £1 (calculated as 230% of qualifying expenditure attracting tax relief at 19%) |
Additional deduction: 86% Corporation tax: 25% Benefit: 46.5p per £1 (calculated as 186% of qualifying expenditure attracting tax relief at 25%) |
| Loss-making SME | Additional deduction: 130% Corporation tax: 19% Benefit: 33.35p per £1 (calculated as 230% of qualifying expenditure at a credit rate of 14.5%) |
Additional deduction: 86% Corporation tax: 25% Benefit: 18.6p per £1 for non-R&D intensive companies (calculated as 186% of qualifying expenditure at a credit rate of 10%) or 27p per £1 for R&D intensive companies (calculated as 186% of qualifying expenditure at a credit rate of 14.5%) |
| RDEC company | RDEC credit rate: 13% Corporation tax: 19% Benefit: 10.53p per £1 (calculated as 13% of qualifying expenditure taxed at 19%) |
RDEC credit rate: 20% Corporation tax: 25% Benefit: 15p per £1 (calculated as 20% of qualifying expenditure taxed at 25%). |
The R&D claims submission process will also see some changes, including requirements that:
- Claims be made digitally.
- The categories of qualifying expenditure incurred be disclosed, and brief details provided of the R&D activities.
- Claims be endorsed by a named senior company officer.
- The company inform HMRC in advance of its intention to make a claim within six months of the end of the period to which the claim relates.
- The details of any agent who has advised the company in making the claim be provided.
Companies must also submit a pre-notification of their claim if they are new claimants or have not claimed in the previous three accounting periods. The new scheme proposed to limit the relief to UK expenditure or any qualifying overseas expenditure to ensure any tax reliefs are for the benefit of the UK economy, but this has been postponed. Under the new scheme, the categories of qualifying expenditure will expand to include data licences and cloud computing costs.
Going forward: a single R&D scheme?
On 13 January 2023, HM Treasury published a consultation on combining the SME relief with the RDEC scheme into a single RDEC-like scheme. This next step is unsurprising given the changes taking effect from 1 April 2023 to align the rates more closely. Through this reform, the government aims to simplify the scheme and to ensure that the UK remains a competitive location for cutting edge research.
Concerns over abuse of R&D tax reliefs has grown in recent years, with the primary issue stemming from unregulated R&D advisers targeting SMEs who are unaware of the R&D relief scheme and suggesting they make a claim. Given that a payable R&D cash credit is available, abuse of R&D reliefs on the SME level is especially attractive. In 2019/20, the National Audit Office extended the qualification in HMRC’s accounts to include R&D tax relief, due to the estimated level of error and fraud. The accounts estimate error and fraud across both schemes as 3.6% of total relief cost, or £311 million in cash.[1] Movement towards the combined system of a single RDEC-like scheme is also motivated by the government’s aims to crack down on this fraudulent activity.
These proposed reforms to R&D relief have not escaped backlash, with many criticising the government for not tackling abuse of the scheme in a way that does not reduce the benefits of the SME regime. The SME regime has positively contributed to the UK’s R&D landscape and has acted as a safety net for loss-making start-ups and companies.
The consultation began on 13 January 2023 and closed on 13 March 2023, and invited views on how a single scheme could be designed and implemented. With many doubting the benefits and rationale behind a single scheme, how this scheme emerges and operates in practice will be especially interesting.
[1] HM Treasury: R&D Tax Reliefs Report. November 2021.
