Many businesses are unsure of what R&D is, let alone whether they’re able to claim it. Fortunately, our R&D Eligibility Calculator actually determines whether you qualify for R&D as well as an estimated figure of what you could be entitled to. Research and Development (R&D) refers to innovative activities undertaken by a business when developing new services or products and improving existing ones. There are many areas included in R&D due to its huge aspect in business. There are two different tax relief schemes companies can claim under; the SME scheme which is available only to SMEs; and also the RDEC (Research & Development Expenditure Credit) 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.
Since Brexit, the government has heavily called for and promoted R&D for smaller businesses. Not only to cut tax costs, but to contribute to the overall picture of the UK being at the forefront of technological innovation. In fact, The government has a target to raise investment in R&D to 2.4% of UK GDP by 2027.
Recently, the government announced new measures in relation to R&D policy and the submission process. We break down the new changes and what it will mean for businesses, why these changes have come about, and the future of R&D…
What are the changes to R&D?
With HMRC reporting that there has been an increased 4.9% of fraudulent R&D claims, the government have prioritised changes to R&D reforms to combat a number of things. Together with the increase in the corporation tax rate, the new R&D scheme will begin as of 1st April 2023. They are as follows:
Extending qualifying expenditure
To incentivise R&D using modern approaches, the government is extending the scope of qualifying expenditures to include the costs of datasets and cloud computing.
To further support cutting edge R&D, the government will make changes to the definition of R&D for the tax reliefs to remove the exclusion of pure mathematics.
Refocusing the reliefs towards innovation in the UK
To ensure the maximum benefit to the UK, relief for subcontracted work and the cost of externally provided workers will be limited to focusing it on UK activity.
There will be some narrow exemptions where factors such as geography, environment, population or other conditions that are not present in the UK are required for research (for example, deep ocean research). As well as where there are regulatory or other legal requirements for certain activities to take place in specific territories.
Tackling abuse and improving compliance
To tackle this, all future claims for either deduction or a tax credit will have to be made digitally. These digital claims will have to break the costs down across qualifying categories and provide a brief description of the R&D.
After the Spring Budget 2023, it was announced that the multiplier rate of 130% would be lowered to 86%. This means it would allow companies to deduct 86% of their qualifying costs from yearly profits, in addition to the standard 100% deduction. As well as this, the tax credit rate has dropped from 14.5% to 10%, whilst the RDEC rate increases from 13% to 20%.
What’s more if your R&D expenditure is 40% or more of your total expenditure you still get the 14.5% tax credit.
Making your claim
Each claim will need to be endorsed by a named senior officer of the company. Companies will need to inform HMRC in advance that they plan to make a claim. They will need to do this using a digital service within 6 months of the end of the period to which the claim relates.
Companies that have claimed in one of the preceding three periods will not need to pre-notify. Claims will need to include details of any agent who has advised the company on compiling the claim.
This is something that we can work with you on to ensure that you have fulfilled the requirements, so please get in touch with our R&D and Tax specialist, Adam Truluck, today to get the ball rolling..
What will these changes mean for the future of UK R&D?
These policy changes for R&D relief came into effect from 1st April 2023. HMRC published a consultation in January 2023 outlining the intention of combining the SME relief with the RDEC scheme into a single RDEC-like scheme. With this reform to R&D policy, the government plans to simplify the scheme. This would ensure the UK remains a competitive location for cutting edge research on a global scale.
Nordens’ Tax Manager, Adam Truluck, believes, “These proposed changes offer both good and bad. Good in the sense that more people are going to be looking for agents to do it for them, which will naturally transpire into ridding pop-up firms that disappear at the first sign of trouble. Bad as it’s going to be a lot more restricted, watched and critiqued a lot closer and in more detail. Basically, not everyone who applies for R&D will be accepted.”
“At the moment, about 95% of claims are not even looked at, so these days are effectively gone. However, what it is going to do is essentially encourage companies to bring their activities onshore to the UK, which should hopefully give a nice boost to the economy when it’s crucially needed.”
We hope this has outlined to you the changes to R&D. If you’d like to know any further information, or anything accounting related, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy to talk you through your query.