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.

COVID-19 and Your Claim

Due to the onset of the pandemic, new COVID-19 scheme effects have been added to the existing rules of the R&D scheme. Several forms of state aid have been introduced to assist businesses effected by the pandemic, and the type of state aid received can affect your subsequent R&D claim.

State aid

Let us start with state aid. State aid is defined as money invested by the Government into domestic businesses and can take the form of many state resources including monetary grants, which do not need to be repaid, or loans which must be paid back. These loans have more favourable terms than those available commercially. Additionally, tax breaks can be offered to greatly reduce a taxpayer’s liability. These come in three forms, either a tax deduction, a tax credit, or a tax exemption, and reduce the amount of gross income that is subject to taxes. State-subsidised aid is distributed by public authorities on a selective basis to organisations that could potentially disrupt competition and trade within the European Union. All state aid provided by the EU is ruled as either notifiable, non-notifiable, or De Minimis.

For R&D purposes, an R&D project cannot receive more than one form of notifiable state aid. As the SME R&D scheme is considered a form of state aid, if a company has received a different form of notifiable state aid and subsequently spent it on their research and development project, they will be unable to utilise the SME scheme. However, if the alternative form of state aid has been separated from the R&D project, the company can still utilise the SME scheme. Other notifiable state aid schemes include the Coronavirus Business Interruption Loan Scheme, Coronavirus Large Business Loan Scheme, Bounce Back Loans, and the Retail, Hospitality and Leisure Grant Fund.

A business can be in receipt of De Minimis state aid and still qualify for the SME scheme. However, any costs from the De Minimis state aid spent on R&D will have to be deducted. For example, the Coronavirus Job Retention Scheme, otherwise referred to as Furlough, is treated as De Minimis state aid. Consequently, any costs subsidised under the Furlough scheme would not be eligible in the claim. As employees were instructed not to work while receiving Furlough, any costs associated with the employee for the period they were furloughed would also have to be removed from the claim. Additionally, the Small Business Grant is considered De Minimis state aid, and any money received and subsequently spent on R&D will be excluded under the SME R&D scheme.

Future Fund

Additionally, a company may receive aid from the Future Fund. As this is not considered either notifiable or De Minimis state aid, any money received from this fund and spent on R&D will have no impact on a company’s eligibility for the SME R&D scheme.

Recovery Loan Scheme

In 2021, a new form of notifiable state aid was introduced called the Recovery Loan Scheme. Although notifiable state aid cannot normally be claimed for under the SME scheme, this scheme was introduced post-Brexit and therefore does not fall in the same bracket as other forms of notifiable state aid. As such, it does not affect a business’s ability to claim on the SME R&D scheme. However, it is important to note that if a company’s R&D activity is subject to the Northern Ireland Protocol, it would subsequently fall under the regular EU state aid rules and would impact a business’s ability to claim under the SME scheme.

Contact us

If your company has received any form of state aid and you are concerned that this could impact your ability to claim, please do not hesitate to contact us. Our team can help identify all qualifying expenditure and compile this into a report format recognised and accepted by HMRC.