Spring Budget 2023

On Wednesday 15 March, the Chancellor announced tax policy changes in the Spring Budget which included further changes to the R&D scheme. We have summarised the key changes and announcements below, highlighting how these could impact your future claims.

Claiming overseas expenditure

It was previously announced that for accounting periods starting on or after 1 April 2023, expenditure for overseas subcontractors or externally provided workers (EPWs) would no longer qualify for R&D tax relief. The aim of the measure was to refocus and promote innovation within the UK.

This change to the scheme will be delayed and will now come into effect for accounting periods starting on or after 1 April 2024. This is to give the Government time to consider the restriction and the design of the potential merged R&D relief combining the SME and Research and Development Expenditure Credit (RDEC) schemes.

This is a great result for businesses. Before the change a lot of companies faced the double hit of a reduction in qualifying R&D categories and the reduction in the R&D relief for SME schemes. With this delay it does allow another year for businesses to claim back overseas costs, and another year to look to transition R&D activity into the UK.

Provision of additional information

The requirement to provide additional information will come into effect for claims made on or after 1 August 2023.

This new requirement is to provide additional information via an online form. The information required is already covered in our reports at the level of detail HMRC will require.

We expect the format of these forms to be published shortly.

Additional Tax Relief for R&D Intensive SMEs

As announced in the Autumn Budget 2022, the enhanced deduction for SMEs, will reduce from 130% to 86% for expenditure on or after 1 April 2023. Losses that are surrendered for a tax credit under the scheme will be payable at a reduced rate of 10%, down from 14.5%.

These changes significantly impact loss making companies, reducing the benefit from 33p in the £ to 18p in the £. This change has been widely condemned by business groups, think tanks, and tax advisors as it largely affects early-stage innovative companies.

In this Spring 2023 Budget, the Government have announced a new rate for R&D intensive SMEs with a payable tax credit at 14.5%. With the reduced enhanced deduction of 86% this would mean a benefit of 27p in the £.

To qualify for the additional tax relief, a company must satisfy a new R&D intensity criterion. This is the ratio of the company’s qualifying R&D expenditure for a period to its total expenditure for the same period. An SME will be eligible if their R&D intensity is 40% or above in the period.

The additional relief will be available for expenditure on or after 1 April 2023, however, the legislation is not yet in place for this relief and is not expected to be in place until summer 2024. Companies who qualify can still apply for an R&D claim prior to this at the current 10% payable rate, and will be able to amend their return for the additional rate once the legislation is in place, or can choose to delay submission until the legislation has come into operation.

Other notes

Recently the House of Lords Finance sub-committee published a report into the R&D schemes. We are still awaiting the Government’s response, but the report does criticise some Government proposals, such as the pre notification requirement. Breakthrough Associates have submitted a detailed and comprehensive input into this review.

The Government’s consultation into a simplification of the R&D relief by merging the SME and RDEC schemes closed on the 13th March. The Government intends to publish the results of the consultation in the summer. We shall update you in due course.

R&D Scheme Changes

HMRC recently released the draft legislation for Research and Development (R&D) Tax Relief following various announcements of changes to the SME and RDEC schemes, which are due to be implemented in April of this year.

We have summarised the key points from the draft legislation and explained how the proposed changes could impact your future claims.

Claiming overseas expenditure

For accounting periods starting on or after 1 April 2023, expenditure for overseas subcontractors or externally provided workers (EPWs) will no longer qualify for R&D tax relief. The aim of this is to refocus and promote innovation within the UK.

There are some exceptions to this rule. If subcontractor costs relate to activities undertaken in the UK or for a UK-based R&D project (by an overseas subcontractor) the costs may still qualify. Additionally, subcontractor costs incurred overseas may also still qualify if all three of these conditions for qualifying overseas expenditure are met:

  • The necessary conditions for your R&D activities are not available in the UK. For example, for legal, social, or geographical reasons, such as deep-sea research.
  • The necessary conditions are available in the location where your R&D activity is being conducted.
  • It is completely unreasonable for the conditions to be replicated within the UK. For example, if you are conducting climate specific testing abroad, which cannot take place in the UK.

Data, cloud & mathematics costs

For accounting periods starting on or after 1 April 2023, data and cloud computing costs will qualify for relief. We are still awaiting the publication of further guidance as to the detail of exactly which elements qualify. However, there are some costs which have already been confirmed to be outside of the scope for an R&D claim, these include:

  • Costs that your Company can recoup. For example, if you are incurring the costs for the data but selling it on.
  • If you have a contractual right to communicate the data with third particles, such as publications.
  • If you operate your own cloud data services, set up costs will not qualify for relief, but costs for operating facilities might.

Pure mathematics will also qualify, however HMRC are yet to provide information on the details.

Provision of additional information

If you are submitting a claim, you will have to complete an ‘Additional Information’ form either along with or in advance of your submission. The form has not yet been released and HMRC are still to confirm if the form will replace the reports that have been requested previously.

The form will outline details regarding the projects, costs, the team members involved, and the agent who supported the Company throughout the claim process.

Identifying the baseline of science and technology you aim to advance, the uncertainties involved in the project, and how you attempted to overcome them will now be required for all R&D claims. The level of expenditure associated with each project must also be included within the report.

At Breakthrough Associates, our reports already cover the level of detail requested by HMRC. We ensure all relevant associated costs per project are captured and presented clearly to HMRC.

New pre-notification requirement

If you have not claimed R&D relief previously or within the last three years, you must notify HMRC of your intention to submit a claim within six months at the end of the accounting period. For example, for a year end of 31 March 2024, you must confirm with HMRC your intention to submit an R&D claim by 30 September 2023.

This is currently being debated as the House of Lords committee does not agree with this suggestion – watch this space!

Changes to benefit structure

In the Autumn Statement 2022, the Chancellor announced significant changes to both the SME and Research and Development Expenditure Credit (RDEC) Schemes in terms of the calculation of the benefit for companies who claim.

The RDEC scheme has become more generous, with the pre-tax payable credit increasing from 13% to 20% for expenditure incurred on and after 1 April 2023.

Claims made under the SME scheme face a reduction in the R&D tax relief for expenditure incurred on or after 1 April 2023. The enhanced deduction, which is the additional amount of relief deductible for tax purposes, will reduce from 130% to 86%. Losses that are surrendered for a tax credit under the scheme will be payable at a reduced rate of 10%, down from 14.5%.

As of 1 April 2023, Corporation Tax will change to a variable rate between 19% to 25%, dependent on profitability levels. Companies with profits under £50,000 will remain at a rate of 19%, and the tax rate for companies with profits over £250,000 will rise to 25%. Between these two levels of profit a system of marginal relief will apply to companies paying Corporation Tax between 19% and 25%. Taking this into consideration, we recommend consulting with a qualified advisor to help maximise the value and benefit of your claim. Examples assuming a 25% tax rate are shown in the table below:

More changes relating to the R&D scheme are expected within the near future as there is a 2-month review taking place concerning the announced changes and merging of the SME and RDEC schemes.

How the changes affect your Company

If you are concerned about how the above changes may impact your ability to utilise the R&D scheme, or you would like to receive further information, please contact a member of our team. They can help calculate how the changes may affect your subsequent R&D claims and help to maximise your benefit.

Changes to the PAYE/NIC Cap

When the R&D tax credit scheme was introduced in 2000, HMRC operated a PAYE/NIC cap for the first 12 years. Following a substantial rise in ‘abusive’ claims HMRC have reintroduced the cap linking the payable tax credit a business can receive to its PAYE/NIC bill. Specifically the cap will address concerns over artificial structures with little or no employment or R&D activity set up mainly for the purpose of accessing the payable tax credit.

What is the PAYE/NIC Cap?

The new PAYE/NIC cap is calculated as a flat rate of £20,000 plus

  • 300% of the total PAYE/NIC payments made in one year (not just spend of R&D related staff)
  • 300% of any externally provided workers (EPWs) PAYE/NIC costs from a connected party
  • 300% of any relevant PAYE/NIC costs incurred by a connected party where the work has been subcontracted out

When is the Cap being introduced?

The cap will affect accounting periods beginning on or after the 1st April 2021.

Who will be affected by the Cap?

The following businesses could be affected by the cap:

  • Loss-making businesses where losses will be surrendered for a cash refund
  • Businesses with very little or no payroll expenditure
  • Businesses who have outsourced lots of work or incurred high prototype costs

Loss making companies will be capped on their payable tax credit in that year. Any payable credit over the cap can be carried forward to use in later years. 

Exemptions from the Cap

A company is exempt from the cap if it meets two tests :

  • If a company is creating, preparing to create, or actively managing intellectual property (IP)
    • IP relates to a patent, trademark, or copyright that is being developed. To qualify, the activities associated with the IP must have been undertaken by company employees, not by subcontractors or EPWs, and the company must hold the right to exploit the IP.

AND

  • If a company’s expenditure on work subcontracted to, or EPWs provided by, a connected party is less than 15% of its overall R&D expenditure

What to do if your Company is affected by the Cap

If your business meets any of the above requirements and you would like to receive further information regarding how the PAYE/NIC cap might affect your R&D claim, please do not hesitate to contact a member of our finance team. They can help calculate how the cap may affect your subsequent R&D claim.