By Jemma Vaughan, director at Hazlewoods 

A number of changes to R&D tax relief are due to take effect from April 2023 in one of the biggest shake ups to the regime since its inception.

Some changes were announced back in 2021 but there was a surprise announcement to vary the rates of relief in the Autumn Statement at the end of last year and possibly the biggest change of all proposed for next year.

The changes set out below are effective for accounting periods beginning on or after 1 April 2023, unless otherwise stated.

Changes to the rates of relief

Changes to the rates of relief will take effect from 1 April 2023, hailed as a rebalancing of the generosity of the reliefs in the Autumn Statement announcement. Based on projections, however, there will be more losers than winners.

The RDEC scheme rate is increasing from 13% to 20% which will give an overall tax saving equal to 15% of the company's R&D expenditure (compared to 10.53% currently).

The SME additional deduction is decreasing from 130% to 86% which will result in a reduction in a company's CT liability of 21.5% of R&D expenditure (or 16.34% if subject to corporation tax at the lower 19% rate) compared to 24.7% currently.

The SME payable tax credit is also decreasing from 14.5% to 10%, with an overall impact of almost halving the cash credit that could have been claimed previously.

Extension to qualifying costs

As previously announced there will be an extension to the costs qualifying for R&D relief including data and cloud computing costs. It will not be possible to make a claim, however, where the costs can be recouped, for example, if the company later goes on to sell the data.

Pure mathematics will also now be included within the definition of qualifying R&D.

Relief focused on UK activities

With a focus on R&D activities being carried out in the UK, costs incurred in the use of third-party overseas subcontractors and externally provided workers (EPWs) will no longer be qualifying unless it is necessary to undertake the R&D overseas, for example, for environmental testing or due to regulatory reasons.

Advance notification

Another key change to be aware of is that new claimants, as well as companies that have not claimed R&D tax relief in the last three calendar years, will need to notify HMRC within six months of the end of the accounting period in which R&D took place that they intend to make a claim.

No advance notice is currently required and therefore businesses will need to review expenditure and R&D activities earlier and take action where appropriate by completing a standardised claim notification form.

Additional information requirements

A new form in support of an R&D claim will also need to be submitted, with details of projects undertaken, a breakdown of the qualifying costs, the workers involved in R&D activities, as well as details of the agent that has helped to prepare the claim.

Claims prepared by Hazlewoods' Innovation taxes team would already include most of the required information in our R&D claim report, however, for some firms this could be a big procedural change.

We are currently awaiting confirmation on whether a form will be required in all cases if a full claim report has also been submitted, as this would result in additional admin for all.

Digital claims

With effect from 1 April 2023, new legislation will also mandate that any corporation tax returns that include an R&D claim must be submitted digitally via HMRC's online tax return portal. This will include amended returns and the only exception will be for companies that are exempt from filing online.

A 'simplified' single scheme

Narrowing the gap between the rates of relief for the two schemes appears to be a first step towards a single R&D incentives scheme which has been proposed to take effect from April 2024.

A consultation on this has now been released and HMRC proposals seem to be favouring a scheme similar to that of the existing 'above the line' RDEC scheme which will apply to all companies regardless of size.

HMRC enquiries

HMRC have been placing increasing scrutiny on R&D tax relief claims in recent months in an attempt to flush out any irregular and potentially fraudulent claims.

They have recently sent over 2,000 nudge letters to R&D tax relief claimants asking the companies to check their claims are complete and correct.

If you are considering submitting an R&D claim you should carefully consider whether you believe the company has genuinely undertaken projects aimed at achieving an advance in science or technology.

If you would like any assistance or advice on whether you may be eligible for R&D tax reliefs, please get in touch with Jemma Vaughan on 01242 237661 or Jemma.Vaughan@hazlewoods.co.uk.