Key changes to R&D tax relief schemes

There are some significant changes that have recently been introduced in relation to R&D tax credits, with effect from varying dates. These will impact all claimants, so it is useful to be aware of the various changes and the dates from which they apply.

Changes from 1 April 2023

Rate changes:
• R&D expenditure credit for large companies has increased from 13% to 20%;
• The SME additional deduction rate has decreased from 130% to 86%;
• The SME payable R&D tax credit has decreased from 14.5% to 10% except for ‘R&D intensive’ SMEs.

Claims for cloud and date expenditure:
Prior to 1 April 2023, these costs did not qualify for relief, however with effect from that date licence fees to rent cloud computer storage space or payment for data costs qualify.

Changes from August 2023:

• All claims must be made digitally;
• Claims must include more details, specified by HMRC;
• Each claim must be endorsed by a named senior officer of the company;
• Companies must inform HMRC in advance that they plan to make a claim; and
• Claims must include details of any agent who has advised the company in making the claim.

Changes from 1 April 2024

Overseas activities:
Qualifying expenditure is restricted to UK expenditure, for both the RDEC and SME schemes. This was due to take effect for accounting periods beginning on or after 1 April 2023 but has been delayed to accounting periods beginning on or after 1 April 2024.

In summary:

• Subcontracted out R&D will only qualify for R&D tax credits where the third party undertakes the R&D in the UK;
• Under the large company scheme, payments to qualifying bodies such as universities, to undertake independent research will only qualify if the activities are undertaken in the UK; and
• Payment to externally provided workers (provided by third party staff providers) will only qualify where the salaries are paid through a UK payroll.

The revisions being made to the R&D tax relief scheme are intended to combat widespread fraud. HMRC published a report in July 2023 which estimated that over £1bn of the SME tax relief granted could be funding non-compliant claims. Fraudulent claims were especially common among smaller claims. In cases involving less than £10,000 worth of expenditure, over 75% of the claim value was found to be non-compliant.

Ensuring that tax relief and credits are correctly awarded to companies who invest in innovation is very important and whilst we all welcome the efforts being made to prevent fraud, more concerning for clients is the increased emphasis on compliance checks and questioning applications for tax relief. We will continue to advise clients pragmatically about whether their projects could attract R&D tax relief and support them with realistic claims that HMRC are likely to accept.

If you would like help with making R&D tax credit claims, please contact us via partners@rjp.co.uk.