R&D Tax Relief is about to get seriously downgraded27/02/2023
R&D tax relief was introduced in April 2000 for SMEs (defined, as companies with up to 500 employees).
It was a government incentive designed to reward UK companies for investing in innovation by either reducing their taxable profits or providing a tax credit when they were losing money. The latter was particularly important in encouraging underfunded start-up companies to continue operating in innovative spaces. In April 2013, large companies were also included, with the announcement of the R&D Expenditure Credit scheme.
Initially, these schemes were effective at carrying out their purpose: making it easier for British companies to spur innovation, contributing to science, and the economy. However, issues soon appeared that suggested an update of the scheme was required.
Although the schemes’ simplicity was a positive in many ways, it also meant that companies were poorly targeted. Software claims, in particular, came in harder and faster than anyone expected. HMRC also caused confusion over claims, confusing what counted as R&D activity under the schemes. Perhaps unsurprisingly, this facilitated abuse: several bogus claims were made by third-parties which were more concerned with the magnitude of their commission than the quality of their submission.
Changes to R&D from April 2023
Following his appointment as Chancellor, Jeremy Hunt announced major changes to the Research and Development (“R&D”) scheme. These changes will benefit some businesses, but they are likely to disadvantage many more, as the rates of relief are set to be drastically reduced beginning in April 2023.
At present, tax relief for SMEs is still extensive. It allows for a tax deduction that surpasses the initial amounts spent or, in many cases, creates a cash reward for losses surrendered.
The enhanced rate for SME R&D spending is 130%. However, the projected revision will cut this to 86%, with the payment credit reduced from 14.5% to 10%. Loss-making SMEs would also have their payable credit reduced from 33% credit on eligible expenditure to 19%.
There is some good news, however. Businesses who apply for the R&D Expenditure Credit (“RDEC”) will see the percentage of payable credit rise to 20%, from 13%.
In tightening up the R&D tax relief process, HMRC will also be implementing the following changes:
Claims must be submitted digitally, meaning no more modifications via post. This should make HMRC’s examination claims simpler, cutting down on the potential for human error. Additionally, specific information (such as a breakdown of certain categories of spending) will need to be included in claims. All claims must be approved by a named official of the firm, which should put a stop to shady claims made by third parties without informing the firm. Claims must contain information about any associated agents. Finally, unless they have claimed in the previous three years, businesses must file a pre-notification of their claim within six months of the period’s end. This would reduce the advantage of R&D for new businesses because they will no longer be able to claim for earlier periods, as they can now.
However you look at it, the R&D changes coming into the UK in April will have a drastic impact on innovative companies around the country. This is not to say they are not a necessary adjustment, but it would be naïve to suggest that many companies won’t be burdened by them. If you are concerned about your business’s continued profitability under the new R&D tax regime, contact JW Hinks on 0121 456 0190.