Since its introduction in 2000, research and development (R&D) tax relief has undergone numerous changes. For example, the large company scheme was introduced in 2002, then replaced by the Research and Development Expenditure Credit (RDEC) between 2013 and 2016. There have also been numerous tweaks and rate changes. But, until now, never have we seen so many changes introduced around the same time.
The main changes to R&D tax relief, announced in the Chancellor’s Autumn Statement, need to be looked at against a backdrop of lots of negativity around the relief, arrests being made for fraudulent claims, a struggling economy and some strident policing actions by HMRC. These include compliance checks using standard templates with a disregard for reports already submitted, HMRC's stance on ‘subcontracted’ and ‘subsidised’ R&D, seeking penalties where the claimant has not been careless, and so on.
The lack of a connected-party exemption could backfire
Effective dates
The changes announced in last November's Autumn Statement will take place for accounting periods commencing on or after 1 April 2023. Therefore, unless a company prepares accounts for a period of less than 12 months, or a company has a long period of account such that the period falling after the first 12 months of the period of account starts after 1 April 2023, then most of the impact will be felt for periods ending on 31 March 2024 and beyond.
The good news
Let’s start with some good news. For accounting periods beginning on or after 1 April 2023, a wider range of cost categories will be available for inclusion:
- pure mathematics (definition not yet provided)
- data and cloud computing costs including the cost to acquire data used directly in the R&D project with no future value or resale value to the claimant, and the cost of cloud computing services including the provision of access to and maintenance of remote data storage, operating systems, software platforms and hardware facilities. The cost must directly relate to the R&D activities – in other words, qualifying indirect activities that are normally eligible for relief will not be so under this category of cost.
The bad news
At the same time, it will no longer be possible to claim for subcontractor and externally provided worker costs where those activities take place outside the UK. There are two exemptions:
- geographical, environmental or social conditions, as a result of which the R&D activities may not be undertaken in the UK
- legal or regulatory requirements, as a result of which the R&D activities may not be undertaken in the UK.
The legislation makes it clear that cost and availability of resource are not exemptions to the exclusion. Therefore, companies using overseas resources face a choice:
- Use a UK resource (if available) at a higher cost.
- Accept that the R&D tax relief claim will be reduced.
- If viable, move the R&D to a jurisdiction with no such restrictions.
If the cost has been processed through a UK payroll, it can still be claimed.
It is disappointing that the SME claimants are being punished with lower rates and other barriers
Anti-abuse steps
We await the details of these proposals, but they include the following:
- All claims must include project and cost details. Many advisers prepare such reports, but they have never been mandatory until now and it is surprising that this step wasn’t taken a long time ago. All claims must now be supported with detail. This may lead some advisers who ‘dabble’ in the relief to outsource to an R&D tax relief specialist.
- The agent who advised on the claim must be named.
- There must be an endorsement from a senior officer of the company.
- The claim must be made digitally.
- Companies that have never claimed R&D tax relief before must notify HMRC in advance of their intention to claim within six months of the end of the accounting period to which the claim will relate. Companies that have made claims in any of the prior three periods do not have to notify. The filing date will remain unaltered, being 24 months after the end of the accounting period (for an amendment to the Company Tax Return CT600). It would appear from the technical press that professional bodies and advisers are in agreement that this does not prevent poor claims in any way and will in fact result in legitimate claimants losing out.
Blow to SMEs
Against the backdrop of an increase in corporation tax to 25% for companies with profits in excess of £250,000 and the revival of marginal relief (effective rate of 26.5% for profits between £50,000 and £250,000), there was the disappointing news in the Autumn Statement that the SME R&D tax relief rates were to be reduced.
As before, let's start with the good news. The RDEC rate will increase from 13% to 20%. The after-tax impact will increase from 10.53% (based on 19% corporation tax) to 16.2% (based on 19% corporation tax) or 15% (based on 25% corporation tax).
However, in a further blow to SME claimants, the enhancement rate is to fall from 130% to 86% (which is still higher than the first two rates it was set at, of 50% and 75%). The tax credit rates for loss-making entities will fall from 14.5% to 10% (the lowest ever). This change punishes genuine SME claimants who are in the early stages of their R&D and likely to be loss-making.
It is stated that we will move to one RDEC scheme in the near future, and this is a step towards that goal.
Let’s hope that some of these steps are short term until problems are ironed out
Still worthwhile
It is disappointing, given the need for the UK to continue to be at the forefront of R&D, that SME claimants are being punished with lower rates, advance notification steps and other barriers and hurdles. While there may be fraudulent claims that need stamped out, the innocent should not suffer.
Let’s hope that some of these steps are short term until problems are ironed out and the UK can once again offer a better R&D tax relief scheme than other countries. In the meantime, it should be said that a strong, genuine claim is very much still worthwhile, and all the doom and gloom should not overshadow this.
