2023 R&D tax relief changes: what are they & what do I need to know?

Research and Development (R&D) tax relief rules in the UK have changed in 2023. If you’re a business owner or director, we’ve put together a summary of what the R&D tax relief changes are and what you need to know. At Sampson Fielding in Mayfair, London, we are a team of chartered accountants and business advisors and this overview is to help you take steps confidently in your business.

Introduction to the Research & Development Tax Relief changes

HMRC announced earlier this year a change in the UK Research and Development (R&D) tax relief scheme. We have set out below details of how some of these changes may impact your businesses claim as well as a reminder of the key criteria that need to be met in order for an R&D claim to be made. HMRC have also consulted on merging the two current schemes into one so there may be some more changes on the way.

See the HM Revenue & Customs Policy paper on Research and Development Tax relief reform changes

What are the main points of the Research & Development Tax Relief changes?

Here are the main points of the changes in 2023 to help you orientate yourself and your business:

• All R&D claims are required to be made digitally

• A new compulsory information form must be submitted alongside the tax return for claims made after 8 August 2023

• The R&D claim must be authorised by a senior member of the company who should be named

• Advance notification is required within 6 months of the end of the first accounting period an R&D claim will be made

• Change in rate of tax relief for SMEs from 1 April 2023, with a reduction in the additional deduction for qualifying costs to 86% and reduction in tax credit percentage to 10% (or 14.5% for research intensive companies)

• The rate of RDEC has increased to 20% (from 13% pre 1 April 2023)

• HMRC have proposed a change from 1 April 2024 to exclude overseas sub-contracted costs from R&D claims

Who is eligible for Research & Development Tax Relief?

To qualify for R&D tax relief in the UK, businesses need to meet specific eligibility criteria set by HMRC. These criteria are designed to ensure that the activities being claimed for genuinely involve scientific or technological innovation, experimentation, and the resolution of technical uncertainties.

What are the criteria for Research & Development Tax Relief?

The criteria for Research & Development Tax Relief can be summarised below:

Advancement in Science or Technology

Your project must seek to achieve an advance in science or technology, which means that it should involve creating new processes, products, or services or improving existing ones in a way that goes beyond what is currently known and used.

Uncertainty

Your project must involve an element of technical uncertainty. This means that during your R&D activities, you encounter challenges or problems that cannot be easily solved using existing knowledge or expertise. You should be actively working to overcome these uncertainties and other experts in the field shouldn’t be able to easily solve the problem.

Systematic Investigation

Your R&D activities should involve a systematic process of investigation, experimentation, and analysis. This includes planning, testing hypotheses, making iterations, and documenting the results and outcomes of your experiments.

Technological Competency

You must have the necessary technical expertise within your organisation, or you must collaborate with experts who possess the required knowledge and experience to address the technological challenges in your R&D project, known as “competent professionals”.

Ownership and Control

You should own or have the rights to the intellectual property resulting from the R&D project. This criterion ensures that the financial benefits of the tax relief are directed to the organisation that undertook the qualifying R&D activities.

What costs can I claim for under Research & Development Tax Relief?

Businesses can include certain costs associated with their qualifying R&D activities. These costs contribute to the calculation of the tax relief, whether through the SME R&D scheme or the Research and Development Expenditure Credit (RDEC) scheme. Only the proportion of these costs that are directly related to the qualifying R&D activity can be included in the claim. Therefore, it is important to accurately identify and include only eligible costs in your claim.

It is also important to keep accurate records of qualifying costs to substantiate a claim. This could be through employees keeping detailed timesheets of allocating time between different qualifying projects. Other expenditure throughout the year should also be tracked on a regular basis and allocated to each project, with supporting invoices and receipts maintained.

Can you summarise the eligible costs in a Research & Development Tax Relief claim?

Here's a summary of the costs that can be included in an R&D claim:

Staff Costs

• Salaries, wages, and bonuses of employees directly involved in R&D activities

• Employer's National Insurance contributions related to staff engaged in R&D

• Pension contributions for employees involved in qualifying R&D

Subcontractor Costs

• Expenditures paid to subcontractors or external entities directly engaged in R&D activities on your behalf, i.e. you are paying for a service rather than an induvial (see Externally Provided Workers definition below)

• Up to 65% of qualifying subcontractor costs can be included in an SME R&D claim

Consumable Materials

• Costs for materials and consumables that are directly consumed during R&D activities, such as chemicals, prototypes, and testing equipment

Software Costs

• Costs of software licenses or subscriptions used directly in R&D projects, including software tools, simulations, and modelling programs

Externally Provided Workers (EPWs)

• Costs for externally provided workers, individuals who are not employees but work under your direction and supervision as part of the R&D project

• Up to 65% of qualifying EPW costs can be included in an SME R&D claim

Clinical Trial Costs

• Costs associated with conducting clinical trials for pharmaceutical or medical products

Utilities and Overheads

• A portion of overhead costs, such as heating, lighting, and rent, that can be directly attributed to the R&D project

Capital Expenditures

• Certain capital expenditures for assets used in R&D, subject to specific conditions

What’s are the recent changes to the Research & Development Tax Relief legislation?

Advance notification

For accounting period beginning on or after 1 April 2023, an advance notification form is required to be submitted to HMRC online in the following circumstances:

• The company is claiming R&D relief for the first time

• The last claim made by the company was made more than 3 years after the last date of the claim notification period

This form includes basic details for the company making the claim, as well as a summary of the high-level planned activities for the period showing how the project meets the definition of R&D. Broadly, if you have made a R&D claim in the past 3 accounting periods, no advance notification form is required. In some circumstances the period can be different, so it is worth confirming with an advisor whether this advance notification is required.

If this form is not submitted, HMRC may remove the tax relief from your corporation tax return.

Additional information form

For all claims made (from 8th August 2023 onwards), an additional information is required to be submitted to HMRC before or alongside the corporation tax return. The form includes basic details for the company but also requires additional information for the following:

• Details of each category of qualifying expenditure

• Details of each category of indirect qualifying expenditure

• A description of projects. The level of information depends on the number of projects included in the claim as follows:

  • If 1 to 3 projects – provide details that cover 100% of qualifying expenditure

  • If 4 to 10 projects - provide details to describe those projects that account for at least 50% of qualifying expenditure, and a minimum of 3 projects

  • If 11+ projects - provide details to describe those projects that account for at least 50% of qualifying expenditure, and a minimum of 3 projects

For each project required to be disclosed, the following information must be provided:

• What is the main field of science or technology

• What was the baseline level of science or technology that the company planned to advance

• What advance in that scientific or technological knowledge did the company aim to achieve

• The scientific or technological uncertainties that the company faced

• How did your project seek to overcome these uncertainties

• Which tax relief you’re claiming for and the amount

What is the difference between the SME & RDEC Research & Development Tax Relief regimes?

To qualify as an SME, the company and its partner or linked entities must fall within the following limits:

• Staff headcount less than 500

• Turnover not exceeding €120m; and

• Balance sheet total not exceeding €86m.

A large company falling within the RDEC scheme is any company that is not an SME.

What are the different rates of relief for the SME vs. the RDEC Research & Development Tax Relief regimes?

SME Research & Development Tax Relief regime

From 1 April 2023, an additional tax deduction equal to 86% of the qualifying expenditure is available giving companies a total deduction for qualifying expenditure of 186% (reduced from 230% pre-1 April 2023).

A company can surrender unrelieved trading losses for a payable R&D tax credit. The rate of repayable tax credit is 10%, except for research intensive SMEs.

Instead of surrendering the losses for the repayable tax credit, a company can elect to carry the trading losses forward to be used against any future trading profits. Given the corporation tax rate has increased to 25% for profits over £250,000 (19% for small profits under £50,000), consideration should be given as to whether the carried forward losses may provide more benefit than the cashflow benefit of the repayable tax credit.

A research intensive SME is one where at least 40% of its total relevant expenditure is relevant R&D expenditure. Relevant R&D expenditure is amounts qualifying for R&D relief. For these purposes ‘total relevant expenditure’ is expenditure brought into account in calculating for corporation tax purposes the profits for the period of any trade carried on by the company. If a company meets this criteria, the repayable tax credit increases to 14.5%.

If an SME has received a grant, subsidy, or customer contribution, the relief under the SME scheme can be reduced or withdrawn. For example, if all costs of a project are covered by a grant or subsidy that is notified state aid, any expenditure on this project will not qualify (although a claim under the RDEC regime is allowed).

RDEC Research & Development Tax Relief regime

From 1 April, the rate of RDEC relief available to be claimed on qualifying expenditure is 20% (increased from 13% pre-1 April 2023).

The credit forms part of the company’s trading profits for the period. The tax credit is then offset in a step-by-step approach, firstly against any corporation tax liability for the accounting period. The amount is then offset against certain amounts, including corporation tax, PAYE and VAT outstanding with any remaining credit repayable to the company.

Anything else I need to know about Research & Development Tax Relief changes?

Navigating the complexities of R&D tax relief can be daunting, but you don't have to go it alone. At Sampson Fielding, we're committed to guiding you through these intricate regulations. Let's work together to ensure you're not just compliant but also maximising the benefits available to you.