Reform of the Research and Development (R&D) Tax Credit and Relief System will be Implemented from 1 April 2023

Here’s a summary of the changes

The R&D tax credit and relief system is being overhauled and new rules will be in place for businesses with accounting periods beginning on or after 1 April 2023. There are important changes accountants and advisors need to be aware of which will need communicating to affected clients. This blog sets out some of the high-level changes being implemented. Please note R&D tax rules are complex and HMRC expects all claims to be accompanied by an expert technical report. Specialist advice should always be taken if your clients are considering an R&D claim.

Who do the reforms affect?

The reforms will affect any company carrying out Research and Development (R&D) work who then claim R&D Expenditure Credit (RDEC) or other R&D tax reliefs. RDEC is typically claimed by large companies, with small and medium (SME) sized companies claiming R&D tax relief on qualifying expenditure.

If any of your clients are seeking to claim RDEC or more likely, R&D tax relief, it is vital to engage a specialist advisor to prepare the technical report HMRC needs to support an R&D claim. The report will set out how R&D expenditure follows HMRC legislation along with detailed evidence to support the claim, such as how the expenditure has enabled advancements in technologies and which problems have been overcome. All costs must be itemised along with evidence they were incurred on a specific R&D project. The more accurate the information you provide to HMRC in the technical report, the better chance you have of securing the necessary approvals in a timely way for your clients. The technical report can only be submitted to HMRC online.

What are the reforms and new rules?

The reforms will be fully implemented for businesses with an accounting period beginning on or after 1 April 2023. Companies with accounting periods that straddle this date will need to prepare a claim involving the outgoing rules and the new rules. It is worth discussing with your clients the timing of any planned R&D expenditure to ensure entitlement to relief is maximised.

New conditions for submitting a claim

From 1 April 2023, any company that has not previously submitted an R&D tax relief claim must let HMRC know they are considering a submission within six months of the end of the accounting period for which the claim relates. A business that has made a claim in the last three accounting periods does not need to notify in advance.

This means new claimants will not be able to include the previous two closed tax years’ R&D projects within their first claim unless the necessary notification for the earlier period is made by the due date. If a company notifies HMRC but does not make a claim, they will need to notify HMRC when they are ready to claim in the future. The time period to make the claim remains at two years from the end of the relevant accounting period.

New categories of expenditure are now eligible for tax relief

For accounting periods beginning on or after 1 April 2023, R&D expenditure categories are being extended to include data sets and cloud computing. This is particularly relevant to any clients who operate in the Technology, Media or Telecom sectors where R&D costs can be significant. Expenditure on items such as license fees to rent cloud computer space, or on data sets to support R&D work can also be claimed along with expenditure on pure mathematics, bringing many more companies into the R&D tax relief system.

If a client wishes to claim, the relevant R&D expenditure must be physically incurred in the UK, which means any costs incurred overseas and recharged to a UK company are not eligible. While this change will mainly affect larger companies, your clients will need to be aware of this change when considering the outsourcing of any R&D work to an overseas territory.

Data and computing costs are only eligible when they relate directly to R&D support activities. Clients cannot claim for general support services or back office costs.

Changes in rates affecting Small and Medium-sized companies (SMEs)

Under the government’s current rules, SMEs obtain additional tax relief equal to 130% of eligible R&D expenditure. From 1 April 2023, this will decrease to 86%.

With the increase in corporation tax also introduced from April 2023, a company paying the highest rate of corporation tax (25%) will see a reduction in the cash benefit from their R&D claim.

Companies reporting a loss can surrender losses for a cash R&D tax credit (RDTC). The RDTC rate was 14.5% and this is being reduced to 10% from 1 April 2023.

Getting your clients ready for the new rules from 1 April 2023

Accountants submitting R&D claims on behalf of clients will know that HMRC reviews claims in detail and usually asks for additional clarification about the technical report prepared by an expert. Your clients will need to ensure effective systems are in place to collect information about R&D expenditure and that specialist technical advice is taken to ensure eligibility. Clients will also need to be mindful of the new rules that mean expenditure must be incurred on activities based in the UK and that expenditure incurred overseas cannot usually be claimed (there are some exceptions which should be discussed with HMRC on a case by case basis).

How Initor Global can help your Practice

As you can see from the above, the application of R&D tax relief rules to your clients can be complex and requires specialist, technical advice. Many of your clients will seek your advice when considering a claim.

At Initor Global we can support your Practice by preparing R&D tax relief calculations based on information provided by your clients. We can also support you through the preparation of annual accounts, company tax returns, self-assessment tax returns and payroll. To discuss your outsourced accounting needs in more detail, you can contact us on hello@initor-global.co.uk or visit our website at initor-global.co.uk.