Navigating R&D tax credits changes

Additional tax relief for R&D-intensive SMEs 

During the Autumn Budget, it was announced that the SME cashback would be reduced from 33% of qualifying expenses to just under 19%. There were real concerns about the negative impact of reducing the SME cashback rate on R&D investment. This could’ve had a severe impact on cashflow planning and companies would have to budget this to create the next generation of products and services. However, these concerns were addressed in the Spring Budget.

One of the major announcements in the Spring Budget is that the SME cashback rate has increased up to 27% for businesses that invest heavily in R&D. However, the new higher cashback rate can only be applied to businesses who spend more than 40% of their total expenditure on R&D. HMRC is calculating this split by dividing the qualifying R&D expenditure by the total expenditure within the business. This total expenditure will cover all linked entities. This will have a major impact on some R&D-intensive businesses that will be stuck in the lower rate bracket due to the quirks of this calculation, such as SMEs that carry out grant-funded work under the RDEC scheme or SMEs where the claimant might be linked to multiple other businesses. 

However, it needs to be clarified how this scheme will be implemented. This increased rate is not available until the current finance bill is approved. Therefore, R&D-intensive companies wishing to submit an R&D claim at the moment will still have to claim under the revised cashback rate of 10%, which is less than ideal.

Delays to previously announced R&D tax relief changes 

Many businesses had been planning for previously announced changes to come into play on 1 of April 2023. Some of these changes went ahead, such as including pure mathematics as a qualifying activity, or expanding the definition of qualifying expenditure to include hosting and cloud computing costs. 

But there are delays to other changes. The Spring Budget announced a postponement of the overseas restriction on qualifying spend until 1 April 2024. Although many SME enterprises welcomed this restriction being postponed, other businesses may have already budgeted for this change and prepared for this to come into effect. This has led businesses to ask why this change was not announced sooner. We expect that the R&D scheme will move onto a UK-only footing in the near future. But with an election looming next year, it wouldn’t be surprising if this change is further delayed.

HMRC announced that claimants must obtain a higher level of personal responsibility to submit a claim whereby someone within the claimant company must endorse each claim. This means that someone within the senior leadership team will have to thoroughly understand what has been claimed and why, to personally endorse their claim as part of HMRC’s approach to reduce error and fraud within the scheme. 

Another key change is that the pre-notification and the requirement to complete HMRC’s digital information form will become mandatory from August 2023. It will also become mandatory to submit claims via the HMRC portal from this point onwards.

What additional information is required?

You must tell HMRC if you plan to claim R&D tax relief or expenditure credit for accounting periods beginning on or after 1 August 2023 if:

• you’re claiming for the first time
• you’ve claimed for the previous tax year, but you did not submit that claim until after the last date of the claim notification period (the claim notification period ends six months after the end of the period of account)
• your last claim was made more than three years before the last date of the claim notification period

Claimants will also be required to submit a formal ‘Additional Information’ form from 1 of August 2023. This will set out a wide range of information relating to the R&D projects, the costs involved, and the workers involved which must be accurate and tied to the accounts. HMRC is asking for a further split of costs by project, including the qualifying indirect and direct costs attributable to each eligible project. This novel form will be required to submit an R&D claim and must provide sufficient evidence to HMRC that the R&D projects claimed are eligible under the scheme. At the moment, the online form is highly basic and there are concerns that bugs and errors might occur when using the additional information form which could affect the status of the R&D claim.

How we can help

In the light of recent changes, businesses will have to tread very carefully to ensure that they are adhering to the new rules within the R&D scheme. The scheme is becoming increasingly complex, and your business will need to be on top of the R&D claim preparation process. We can carry out a comprehensive review of your R&D activity to ensure that you’re maximising your claim and prepare your R&D report based on up-to-date legislation changes to minimise your potential exposure to an HMRC enquiry.

Get in touch

If you would like to speak to one of our R&D experts to find out more about how we can help, please get in touch via the form below.