What are the 2023 R&D tax credits changes? 

Listen to our podcast version of this article:

The 2023 R&D tax credits changes came into force in April 2023, as announced in the Chancellor’s 2023 Spring Budget. Whilst R&D tax credits have long been established since 2000, and the Research and Development Expenditure Credit (RDEC) scheme since 2013, it comes as no surprise that both schemes have undergone multiple rounds of iterations since their inception. The UK government have continually been adapting both schemes to suit the needs of the economy as well as maintain relevance to the developments and trends in innovative technology advancement. The PAYE and NIC cap introduced in 2021 was just one indication that government were beginning to restrict the generosity of the scheme to ensure that tax relief was being offered for its intended purpose, which is something we see more of in the 2023 R&D tax credits changes.

Why have the government introduced 2023 R&D tax credits changes?

The government have been motivated to reform and bring about the 2023 R&D tax credits changes for several reasons. Firstly, there has been an ongoing need for HMRC to tackle abuse of the system and fraudulent claims as well as improving compliance. As such, one of the changes which will be detailed below includes a new claim process with stricter requirements.

Secondly, the SME R&D tax credit scheme has undergone criticism for low productivity. Although the original rationale was that SMEs required more support than larger corporations because they were often taking bigger risks, the view now is that larger corporations are much more able to successfully bring about innovative changes and technologies due to their experience and resources. This has led to a rebalance in rates in the interest of reducing wastage.

Thirdly, the government are aware that the previously generous scope of both R&D schemes often meant that the UK economy was only seeing a diluted impact from innovative developments. To combat this, the 2023 R&D tax credits changes have a much greater focus and emphasis on qualifying R&D activity taking place in the UK so that the maximum spillover benefit is being received by the local economy.

What are the 2023 R&D tax credits changes?

HMRC have provided a comprehensive policy paper on the 2023 R&D tax credit changes and we summarise the five headline changes below. These changes will affect how much you’ll now be able to receive, which of your costs are now considered to be eligible expenditure, and how you notify HMRC of your R&D tax credits claim.

New 2023 R&D tax credits change in relief rates

From 1 April 2023 the rates of tax relief for SME R&D tax credits scheme will decrease, whilst the RDEC rates will increase:

• Profitable companies using the SME R&D tax credits scheme were previously able to claim tax relief of 130% on qualifying expenditure which has now been reduced to 86%
• Loss-making companies using the SME R&D tax credits scheme were previously able to claim 14.5% of qualifying expenditure as tax credit; this has now been reduced to 10% *
• Profitable companies using the RDEC scheme were previously able to claim tax relief of 13% on qualifying expenditure and this has now increased to 20%
• Loss-making companies using the RDEC scheme were previously able to claim tax credits at a rate of 13% of qualifying expenditure and this has also now increased to 20%

* The one exception to loss-making companies claiming tax credit under the SME R&D tax credits scheme is that they will still be able to claim the previous higher rate of 14.5% so long as they can establish that they are an R&D-intensive company. This is currently defined as a company where their total R&D expenditure is at least 40% of their overall total business expenditure (including any connected companies).

It is important to be mindful that due to the change in corporation tax rates which came into effect 1 April 2023, companies with profits between £50,000 and £250,000 will pay corporation tax between 19% and 25%. This means that if you are a company with profits of at least £250,000, your tax relief is worth 21.5% and this is only a slight decrease of 3.2% from the previous rates prior to the 2023 R&D tax credits changes (this has been calculated by the enhancement rate of 130% multiplied by the old 19% corporation tax rate compared to the new enhancement rate of 86% multiplied by the current 25% corporation tax rate).

New qualifying expenditure under the 2023 R&D tax credits changes

The government have extended the scope of what costs can be claimed as qualifying R&D expenditure in recognition that there is a growing surge in companies investigating and developing the capabilities of artificial intelligence (AI). As such, the cost of creating, running and maintaining machine learning now comes under cloud computing costs which is an eligible expenditure. Notably however, the cost of data storage has not been included under this category and many predict that the government will need to amend this in the near future.

Pure mathematics has previously been explicitly excluded as allowable expenditure as it was considered an advancement in a theoretical field. However, it is now recognised that in a commercial context, the advancement of pure mathematics is often linked and translates into software development. The new guidance boldly states that “mathematical advances in themselves are treated as science for the purposes of these Guidelines, whether or not they are advances in representing the nature and behaviour of the physical and material universe”. This has provided welcome reassurance to many companies that there will be no ambiguity in their claim.

The cost of acquiring datasets for training or testing is now also included as a qualifying expenditure. They are often essential to those companies working in AI or machine learning. However, unlike the guidance around pure mathematics, the guidelines around datasets is currently still being drafted and is under consultation. Some proposed exclusions have been criticised for being excessively restrictive; however there is a general view that HMRC will move to a more ‘practical use’ approach and interpretation with time.

New notification process introduced in 2023

For those claiming R&D tax credits for the first time from 1 April 2023 onwards, or those who have not made a claim in the previous 3 accounting periods, it is now a requirement that you notify HMRC that you intend on putting forward an R&D tax credit claim. This is necessary for both the SME and RDEC scheme. This must be completed within 6 months of the end of the accounting period in which you intend to make a claim. If you have made a claim during the previous three accounting periods, then you do not have to complete this procedure. To notify HMRC you will need to submit an online form. You will receive email confirmation of your submission which contains a reference number. You do not need to include this reference number when you make your R&D claim, however it will still be important to keep a hold of it in case you need to discuss your notification with HMRC.

Additional information now required on R&D claims

From 1 August 2023, HMRC will be requiring additional information to be included on R&D claims. This will be done through the ‘Additional Form’ which needs to be completed and submitted before the company tax return. The additional form will formalise and standardise headings and information required on an R&D claim including a much more detailed breakdown of qualifying expenditure in set headings, the number of R&D projects you are claiming for, detailed descriptions of the projects under set headings, your company’s SIC code, the number of externally provided workers used and their PAYE scheme reference numbers, as well as a named company representative managing the R&D claim and named agents used to support your claim.

Requirement for R&D activity to be based in the UK delayed until 2024

The government intend to implement a new change whereby only R&D activity being performed in the UK will qualify. However, this proposal has been delayed and will instead come into effect from 1 April 2024. This geographic restriction will apply to work being completed by externally provided workers (EPWs) which must be done within the UK in order to so qualify. There will be some specific exemptions offered such as reasons based on geographical, environmental, social or regulatory/legal needs. However, companies may not use the excuse of cheaper labour costs outside the UK or not being able to find suitable workers in the UK as a reason.

Get help with your R&D tax credits claim

To ensure your R&D claim goes through successfully, we can help provide support on calculating your R&D claim to ensure all qualifying expenditure is accounted for and submitted correctly. For first time R&D claimants, we can additionally offer our Advance Assurance service. Contact us to book in a consultation to discuss further.