Intending to ensure that the programme is modernised, affordable, and in better compliance, the government announced proposed legislation in July 2022 addressing significant modification to the UK’s Research and Development (R&D) tax incentives to take effect on 1 April 2023.
On 20 December 2022, HMRC released a draught guidance document outlining the specifics of how these reforms will operate in practice, as well as summarising the substantial additional data that claimants will now be expected to provide to make a claim.
This is the last chance for claimants to give HMRC feedback on the amendments, as the final legislation is anticipated in the Spring Finance Bill 2023. This article examined the potential implications of these amendments as well as the steps claimants need to take to ensure that their ensuing claims comply with the new regulations.
The proposed legislation’s exemptions on the limits to relief for R&D activities carried out abroad were, however, limited, which worries businesses competing with other countries for top specialists or programmes that lead global R&D out of the UK.
The excellent news for cutting-edge tech companies is that “qualified expenditure on software and consumables” has been expanded to include spending on data licences and cloud services.
By enabling businesses to claim an increased corporation tax subtraction or payable credit on their R&D costs, R&D tax credits encourage company investment. This change moves companies closer to a single, streamlined RDEC-like programme for everyone while ensuring that government funding is as efficient as feasible and more competitive.
Without significantly altering the overall financial envelope for supporting R&D, the government will consult on the design of a single scheme and engage with businesses to determine whether further support for R&D-intensive SMEs is required before the Budget. This adjustment increases R&D by streamlining the R&D tax relief structure and bringing the generosity of the two programmes closer.
The net impact is shown in the table below:
Profitable Company
| SME Regime | |
|---|---|
|
Up to 31 March 2023 |
From 1 April 2023 |
|
130% uplift on costs = 24.7% net benefit |
86% uplift on costs = 21.5% net benefit |
| Last Company Regime (RDEC) | |
|---|---|
|
Up to 31 March 2023 |
From 1 April 2023 |
|
Headline rate 13% = 10.5% post tax |
Headline rate 20% = 15% post tax |
Company: Not Making a Profit
| SME Regime | |
|---|---|
|
Up to 31 March 2023 |
From 1 April 2023 |
|
Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy |
Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy |
| Last Company Regime (RDEC) | |
|---|---|
|
Up to 31 March 2023 |
From 1 April 2023 |
|
10.5% subsidy |
15% subsidy |
The tech companies losing money will be affected the most because R&D tax credits can be a vital finance source. Since the present rates are more closely matched, the government may now take the next step toward consolidating the SME and RDEC regimes into a single R&D tax relief rate (like other R&D regimes abroad).
The reliefs are expected to encourage £60 billion in R&D by businesses in 2027–28, a 60% increase from 2020–21, according to the Office for Budget Responsibility (OBR), which has verified that this change has a net neutral impact on R&D spending. The OBR anticipates that the reform will lessen fraud and error while saving £1.3 billion annually by 2027–2028.
References
HM Revenue & Customs. 2022. ‘Reforms to R&D Tax Reliefs’, GOV.UK (GOV.UK): https://www.gov.uk/government/publications/research-and-development-rd-tax-reliefs-reform/reforms-to-rd-tax-reliefs
‘Reforms to UK’s R&D Tax Reliefs – Draft Guidance Published’. 2023. KPMG (KPMG): https://kpmg.com/uk/en/home/insights/2023/01/tmd-reforms-to-uk-r-and-d-tax-reliefs-draft-guidance-published.html
‘R&D Tax Relief Is Changing – Here’s What You Need to Know’. 2022. Bdo.co.uk : https://www.bdo.co.uk/en-gb/plugdin/insights/r-d-tax-relief-is-changing-heres-what-you-need-to-know
Walton, Anna. 2022. ‘R&D Tax Reforms – Draft Legislation Changes Examined’, ForrestBrown: https://forrestbrown.co.uk/news/r-and-d-tax-credit-reforms/
