What are the changes to R&D tax reliefs and how might they affect you?

Over the last 12 months, HM Revenue and Customs and the Government have made a number of changes to the Research and Development (R&D) Regime which have arisen largely from consultations and policy announcements. We have summarised these changes below along with an overview of the current stance HMRC are taking when reviewing R&D claims.

Changes to qualifying expenditure

During the most recent Budget Autumn and Spring Statements, it was announced that expenditure categories will be extended (and retracted) for the first time in many years to include modern computing costs such as:

• Costs of data sets - such as license payments to acquire the use of datasets for the purpose of using them for qualifying R&D purposes especially for Artificial Intelligence (AI) and Machine Learning type claims.
  
• Costs of cloud computing – The costs ideally for small companies to undertake R&D within the cloud and virtual environments to allow these costs to be included for the purposes of using test environments for R&D purposes amongst other uses.
  
• Use of overseas support – Up until April 2024, businesses were not restricted to use support either of overseas workers (particularly relevant for group arrangements), subcontractors and employment agencies to undertake R&D outside of the UK. From April 2024, under current proposals, this will be restricted to limited only to work undertaken in the UK. This will impact companies that use overseas workers such as software developers in other countries to undertake R&D for them with only limited exceptions with specific circumstances where work can be performed outside of the UK.

Changes to rates and a narrowing of both the SME and Large Schemes

SME Scheme

From April 2023, businesses classed as an SME will no longer receive an uplift of 130% for every £1 spent. Instead this will reduce to 86% and for loss making companies that can sell (surrender) their losses to HMRC, the repayable credit will be reduced from 14.5% to 10%.

However, bear in mind, that the Corporation tax rate from April 2023 changes from 19% to 25%, so it would be expected that the repayable tax credit would be reduced based on previous changes in the rate of Corporation tax (albeit it has never been consistent).

For profit making SMEs this is a reduction of 11% and for loss making SMEs this is a reduction of around 15%.

Large Scheme

This is aimed at large companies, groups and certain SMEs that receive grants or are subcontracted to carry out R&D. The calculation is slightly different, and in general, there is a 4-5% increase in the benefit for large companies, and one would expect this to be increased further next year to eventually align the two schemes.

Tackling avoidance and abuse

HMRC have recently hired between 100 – 150 inspectors to review claims and inquiries have increased as a result of this increase in resource.

However, whereas most typical R&D inspectors are from a technical background, it appears that requests are being made for claims and responses to enquiries to be made in layman’s terms to aid and assist them in their enquiries.

This will prove difficult for some businesses where the advancements are by their natures complicated and scientific.

However, what is clear is that reports should contain all relevant facts and calculations be supported to justify their rationale on a line-by-line basis and supporting evidence will be required to be retained on files.

In addition to this, HMRC have also been sending letters to claimants and their company directors under a ‘One to Many’ Letter campaign to review their previous claims and with the supporting checklist, review and notify them of any errors that they think are in these claims.

Whilst we do not know the basis of the recipients, around 2,000 of these were sent as a prerequisite for an enquiry and if one of these letters has been received, it is likely it was sent for a reason, so one should act as soon as possible to review prior claims.

What should businesses be considering now?

If you are an SME facing a reduction in the level of R&D tax relief you will be able to receive post 6th April you may want to consider making a claim before 31st March 2023.

If you are classed as a large company and undertaking qualifying R&D you may want to defer submitting a claim until the start of the new financial year in April 2023 so ensuring you optimise the value of the relief received.

If you would like advice and guidance about either your eligibility for making a claim and/or assistance in preparing and submitting a claim, we strongly advise you to contact a tax specialist who is experienced in R&D reliefs such as a corporate tax partner at Streets Chartered Accountants.