Introduction
The UK’s R&D regime has been incredibly attractive for many years.
Further, HMRC has consistently taken a ‘light touch’ approach to its supervision of the regime.
However, it has been clear for a number of years that there is a core of ‘specialist’ companies that might have taken a somewhat bullish approach to some of their claims.
As such, for some time, there has been speculation over whether the regime is ripe for reform.
To an extent, we are now starting to see that reform reflected in the changes recently announced / confirmed at the recent fiscal events.
Further, over the weekend, we have seen the Treasury open a consultation on reforming the R&D regime. The proposal is that the current dual system of an SME and a RDEC regime is merged into one.
Change is certainly coming…
Overview
There will be material changes to the UK’s Research & Development Tax regime.
These will be introduced with effect from 1 April 2023.
The changes will impact:
- the amount of relief that can be claimed,
- the types of activities that will qualify ; and
- the way in which businesses can claim relief
It is stated that the measures will ensure that:
- “the UK remains a competitive location for cutting edge research”,
- “the reliefs continue to be fit for purpose”; and
- “taxpayer money is spent as effectively as possible”.
It is clear that the changes to the SME scheme are being introduced as a response to perceived error and abuse of the regime. It is a shame that some bad actors have resulted in a dialling back of the benefits for all SMEs.
In addition, the new consultation release suggests the government is eye-ing up a merged, unified regime.
Changes to the rates of relief
General
The rate and form of relief depends on whether the company can claim under the SME regime or only under the R&D expenditure credit (“RDEC”) regime. Large companies can only claim under RDEC along with some SMEs who are outside of the SME regime.
SME regime
Under the SME regime relief is available as follows:
- Where profit making: in the form of an enhanced corporation tax deduction of a percentage of qualifying R&D costs; or
- Where loss making: they may receive the R&D credit, which is a cash payment, in return for surrendering R&D-related losses
RDEC regime
As referred to above, this is targeted at larger companies. However, in certain circumstances, it might be an SMEs claiming RDEC.
The RDEC uses a different method of calculating corporation tax relief on R&D expenditure. This is sometimes referred to as an “above the line” credit claimed as a cash payment.
Changing rates
For expenditure incurred on or after 1 April 2023 the various rates will change. The old and new rates are as follows:
| Profile of taxpayer | Up to 31 March 2023 | From 1 April 2023 |
| RDEC Company | RDEC Credit: 13% Corporation tax (“CT”) rate: 19% Benefit: 10.5% | RDEC credit: 20% CT rate: 25% Benefit: 15% |
| SME (in profit) | Enhanced deduction: 130% Benefit: 24.7% | Enhanced deduction: 86% Benefit: 21.5% |
| SME (loss-making) | R&D credit: 14.5% Benefit: 33.4% | R&D credit: 10% Benefit 18.6% |
Focussing relief on UK activities
In addition to the above, the Government is also introducing territorial restrictions to the regime.
These rules will apply to subcontracted R&D expenditure along with payments for externally provided workers (“EPWs”).
Subcontracted R&D activity will need to be performed in the UK.
EPWs will need to be subject to UK PAYE.
Expenditure in respect of overseas activity will still qualify in some limited circumstances.
Data licences and cloud computing as qualifying expenditure
In better news, expenditure on the cost of data licences and cloud computing will now constitute qualifying expenditure.
Making an R&D claim – revised process
Companies will be subject to a new online pre-notification requirement where:
- It is making an R&D claim for the first time; or
- It has not made a claim in any of its previous three accounting periods
The new procedure means that the company must inform HMRC of:
- its intention to make an R&D claim; and
- the R&D adviser it will be using
within six months of the end of the relevant accounting period (unless the full claim has been submitted within the six-month deadline.) Previously, the only deadline has been the two year (following the end of the relevant accounting period) deadline for making a claim.
New Government Consultation on a unified R&D regime
As stated above, these changes are also now joined by the announcement over the weekend of a new Government consultation on a new, unified R&D regime.
In a previous consultation, had asked views around whether the two schemes should be merged into one. This new consultation develops that idea further.
It appears that the government is coalescing around an ‘above the line’ credit for all parties. In other words, the SME regime will be replaced by a regime that looks more like RDEC for all.
The consultation document also alludes that additional relief might be available to either “R&D intensive companies” and / or “different types of R&D”. In the case of the latter, it might be that relief is targeted at activity with a “social value”.
Following on from any consultation, the new unified regime will be announced at a future fiscal event and implemented, as things stand, for expenditure incurred from 1 April 2024.
Conclusion
The reduction in the rate for SMES is disappointing. This is particularly the case for start-ups for which the ability to claim the repayable tax credit can be an important source of cash.
On the other hand, the increase in the RDEC is to be welcomed and should make the UK’s scheme more competitive internationally.
It is good to see that the categories of qualifying expenditure will be expanded to include data and cloud computing.
The changes in the process for making an R&D claim will be particularly relevant for companies who have not made a claim in the past. They will need to get their affairs in order much more quickly bearing in mind the new six-month deadline.
Finally, the enthusiasm for a unified system is perhaps not wholly unexpected either. The UK is perhaps unusual in offering a dual system.
It is hoped that the Government and all stakeholders can bash into shape a unified system t that preserves the attractive benefits for those currently utilising SME relief and RDEC but manages to ensure that relief is properly targeted and abuse minimised.
Watch this space.
If you have any queries relating to the Research & Development Tax Changes in the UK or tax matters in the UK more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.