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Research and Development Tax Relief - Changes you need to be aware of...

Key changes to R&D reliefs

Thursday 24 November, 2022

There were significant changes to Research and development expenditure reliefs and rules arising from the Autumn Statement.  Some companies, incurring certain revenue expenditure on qualifying research and  development (R&D), may be entitled to further relief for this expenditure.

There are two separate R&D tax relief schemes:

- the small or medium sized enterprise (SME) scheme; and
- the large company scheme.

The SME scheme

Under current law (November 2022), the SME scheme allows SME's to claim an enhanced deduction equal to 230% of qualifying expenditure, and, where they are loss making, to surrender losses in return for a  payment (known as an R&D tax credit) equal to 14.5% of the surrendered loss. An SME enterprise is one that has less than 500 employees and either or both annual turnover not exceeding 100 million euros and annual balance sheet total not exceeding 86 million euros. A company is generally excluded if any company in which it holds, or which holds in it, more than 25% of the capital or voting rights, is not a small or medium-sized enterprise.

Where a claim is made, qualifying research and development expenditure is to be treated as if it were 230% of the actual amount.

For accounting periods beginning on or after 1 April 2021, the amount of payable R&D credit available to SMEs is subject to a maximum limit or 'cap', linked to the company's PAYE liability for the period.

The cap restricts the credit available to £20,000 plus 300% of the 'relevant expenditure on workers', being:

- the company's total liability for PAYE and NIC for the period (for all workers, not just those engaged in R&D); less

- any amounts for employees acting as externally provided workers or sub-contractors on the R&D activities of connected companies (to avoid double counting as the connected company will include these costs); plus

- PAYE and NIC paid by connected companies where they provide externally provided workers or subcontractors performing qualifying R&D for the claimant company.

A company is exempt from the cap if:

- its employees are creating, preparing to create or managing Intellectual Property (IP); and

- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons.

The Large Company scheme

ABOVE THE LINE R&D EXPENDITURE CREDITS ('RDEC'): Where a company claims RDEC, the amount of the credit is included as a receipt in the company's tax computation. The amount of the credit is 13% of the qualifying expenditure. The tax credit is set off against the company's corporation taxl iability for the period. If the credit exceeds the corporation tax liability then a specified order of set off applies, which allows for it to be surrendered as group relief, as well as carried forward, or back, against the company's tax liability for other accounting periods.

What has changed for the SME scheme?

The Chancellor has announced some changes to the existing R&D scheme that will apply from 1 April 2023. From this date the rate of the enhanced deduction will drop from 130% to 86%, with the SME credit going from 14.5% to 10%.

What has changed for the Large Company scheme?

For companies claiming RDEC there are also changes that will apply from 1 April 2023.  From this date the level of credits available under the RDEC scheme will rise from 13% to 20%.

Changes applicable to both schemes

Previously on 20 July 2022, the Government published draft legislation providing for a number of changes to the R&D tax reliefs for companies. These changes will apply for accounting periods beginning on or after 1 April 2023. The changes apply to both RDEC and the scheme for SMEs.

The draft legislation now published includes the following major changes (not exhaustive):

  1.  two new categories of expenditure qualifying for relief will be introduced. These are the costs of data licenses and cloud computing services. A data licence is defined as one to access and use a collection of data services. Cloud computing services include providing access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities. Amendments are also to be made to the patent box legislation, which applies the R&D definitions of qualifying expenditure in its calculations, to include data and cloud computing costs;
  2.  relief for subcontracted work and externally provided workers will be limited to focus on UK activity. Expenditure must either be ‘UK expenditure’ on R&D in the UK or ‘qualifying overseas expenditure’ undertaken outside the UK because the necessary conditions are not present in the UK due to geographical, environmental or social factors (for example deep ocean research) or due to legal or regulatory requirements (for example clinical trials). Cost of the work and availability of workers are specifically excluded as factors enabling expenditure to be qualifying overseas expenditure; and
  3.  all claims to R&D reliefs will have to be made digitally. Claims will have to include a breakdown of costs across the qualifying categories and provide a description of the R&D. A claim will have to be endorsed by a named senior company officer and will have to include details of any agent advising on the claim.
  4. additionally, companies will be required to inform HMRC in advance that they intend to make a claim within six months of the end of the accounting period to which it relates by making an online ‘claim notification’. There will be an exception to the latter requirement for companies which have claimed in any of the three preceding accounting periods.

What action should you take?

If this is your first claim then you must ensure HMRC are notified of your intention to claim within 6 months of your year-end or risk losing your claim qualification. Please note that this requirement will apply subject to the affected accounting period date.

Consider changing your accounting year-end:  Be aware that, as the rules apply to accounting periods beginning on or after 1 April 2023, the commencement of the rules will differ depending on the company’s accounting period end. For example, a company with a March year end will apply the rules from 1 April 2023, whereas a company with a December year end will not start to apply the revised rules until 1 January 2024. Companies may wish to consider the impact that the changes may have and, if significant, to change their accounting year end to capture costs that will be lost in the future or to accelerate the ability to claim newly eligible costs.

However, the wider commercial, accounting and financial implications of such a change for the company should also be considered.

Chris Wallace, Managing Director, Visionary Accountants, St Albans, Hertfordshire said

"Research and Development tax reliefs and credits is a very technical and complex area which is becoming even more so with these changes. Business owners will need to be very well advised to be fully aware of all the different changes coming through in order to prepare and plan for them effectively. As ever, we are keeping our clients informed and are very happy to discuss any concerns or questions they might have. If you would like to have a discussion about your R&D claim please call 01727 730550 to book a consultation."

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