R&D Tax Credits 2023 – Legislation Changes
On 20th July 2022, HMRC published the draft legislation which following the review of R&D tax reliefs (launched at Budget 2021), the government announced the following measures, which will apply for accounting periods beginning on or after 1st April 2023.
This is likely to have an impact on those companies that carry out research and development and claim R&D Tax Relief under either of two schemes – the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief.
It will also affect some companies which have made a Patent Box election. Please remember that the government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027.
Changes To Qualifying Expenditure 2023
- To incentivise R&D using modern computational approaches, the government will extend the scope of qualifying expenditures to include the costs of datasets and of cloud computing. These costs must be linked to the R&D activity.
- 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. Further details as to how this will be addressed, will be published at a later date.
R&D To Take Place In The UK
- Tax relief for subcontracted work and the cost of externally provided workers will be limited to focus only on UK activity. No longer will it be acceptable for a reason to be due to ‘cost’ or ‘workforce availability’ as qualifying overseas expenditure.
- There are a few 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) and
- Where there are regulatory or other legal requirements for certain activities to take place in specific territories (for example, clinical trials). The exemptions will not include cost, or workforce availability
- All claims to the R&D reliefs must be made digitally and break down the costs across qualifying categories and provide a brief description of the R&D. Each claim will need to be endorsed by a named senior officer of the company.
- HMRC will need to be informed in advance where a company plans to make a claim for R&D Tax Relief. This must be via a digital service (further details to be provided) and within 6 months of the end of the period to which the claim relates. The only exemption for pre notification is where the Company has already claimed in one of the preceding three accounting periods.
- Claims will need to include details of any agent who has advised the company on compiling the claim.
Addressing Anomalies & Unforeseen Consequences
- HMRC will allow companies to claim RDEC instead where they had previously erroneously claimed SME relief and the time limit for amending claims has expired.
- There is clarity now where expenditure generally qualifies if the payment is made within two years of the end of the accounting period in which the expenditure was incurred.
- HMRC have now tightened the rules, explicitly amending the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date per Schedule 18 to Finance Act 1998. This will prevent companies which do not receive a notice to file, either because they fail to register or notify HMRC that they are dormant, from benefiting by having more time to make a claim.
- Clarification is provided where businesses growing and transitioning from the SME scheme to RDEC, confirming that where an SME within a group exceeds the size thresholds for an SME, all companies in the group will retain SME status for one year afterwards. Under the current legislation, while the company itself retains its status, other companies in the same group lose their SME status straight away.
- Amending the rule preventing relief for a company which is not a “going concern” so that where a company ceases to be a going concern solely because of the transfer of a trade, and is otherwise viable, it may still claim.
Ensuring Reliefs Run As Intended
- As the Health and Social Care Levy represents a new cost, sections of the R&D rules that currently refer only to ‘National Insurance contributions’ will be amended to also refer to the Health and Social Care Levy. Further details concerning the implementation to be provided.
- Where the Patent Box incentive uses R&D definitions of qualifying expenditure as part of its calculations, it will now include the categories of qualifying expenditure to include data and cloud computing costs.
Need Help Understanding Your R&D Claim Position?
The draft legislation proposes changes in both the policy and the administration of the R&D schemes. If you want to continue claiming the maximum relief for your development in 2023 and moving forward, it’s important that you understand these legislation changes.
For any company considering claiming R&D Tax Relief, here at Counting King, we can offer expert advice ensuring the claims will be fully compliant of the current and any proposed changes. We will also provide you with checklists of things you can implement to maximise future claims.