Business

Tax Corner: What the recent budget means for research and development tax reliefs

The changes to R&D tax reliefs will apply for accounting periods beginning on or after April 1 2023.
The changes to R&D tax reliefs will apply for accounting periods beginning on or after April 1 2023. The changes to R&D tax reliefs will apply for accounting periods beginning on or after April 1 2023.

QUESTION: Our company carries out research and development (R&D) activities and submits R&D tax claims each year to reduce the Corporation Tax bill. What does the most recent budget mean for our claims going forward?

ANSWER: R&D tax reliefs were introduced to incentivise innovation across all sectors to make UK businesses competitive on the global stage. However, in a bid to tweak the relief to make it more fit for purpose and to tackle abuse, the UK Government had previously announced the intended to reform the existing rules.

In July 2022 Draft Finance Bill 2023 was published, with further changes announced by the Chancellor in his November 17 Autumn Statement.

The changes to R&D tax reliefs will apply for accounting periods beginning on or after April 1 2023. Therefore, if you have a December 31 year end, the first year it will apply to your company is the year ended December 31 2024.

The draft legislation now published includes two new categories of qualifying expenditure; the costs of data licenses and cloud computing services. A data licence is defined as one to access and use a collection of data services. Cloud computing services include providing access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities.

Previously R&D activities relating to pure mathematics was excluded from the relief, this exclusion will be removed so that they can form part of qualifying R&D activities.

One of the initial intentions of the reliefs was increase innovative specialisms and skill in the UK, but many companies were outsourcing activities overseas and not developing home grown talent.

Therefore, another change requires expenditure to be either ‘UK expenditure’ on R&D in the UK or ‘qualifying overseas expenditure’ undertaken outside the UK because the necessary conditions are not present in the UK due to geographical, environmental or social factors (for example deep ocean research) or due to legal or regulatory requirements (for example clinical trials). Cost of the work and availability of workers are specifically excluded as factors enabling expenditure to be qualifying overseas expenditure

To tackle the abuse of the R&D schemes, all claims to R&D reliefs will have to be made digitally. Claims will have to include a breakdown of costs across the qualifying categories and provide a description of the R&D. A claim will have to be endorsed by a named senior company officer and will have to include details of any agent advising on the claim.

Additionally, companies will be required to inform HMRC in advance that they intend to make a claim within six months of the end of the accounting period to which it relates by making an online ‘claim notification’. There will be an exception to the latter requirement for companies which have claimed in any of the three preceding accounting periods. Secondary legislation is still outstanding to set out the information to be included with a claim or a claim notification.

While none of the above comes as much surprise, given they have been hinted to over the past few Budgets, the change to the R&D rates effective from 1st April 2023 announced in the Autumn Budget, will have been a surprise. The enhanced SME relief is to be reduced from 130 per cent to 86 per cent, while the rate that losses can be surrendered for payable credit is being reduced from 14.5 per cent to 10 per cent.

At the same time, the RDEC rate will rise from 13 per cent to 20 per cent, indicating the intent to make the RDEC more attractive. The changes taken together will close the gap between the two schemes in terms of the benefit to claimants, although the SME scheme is still marginally more attractive. This is unsurprising when you realise that the government is considering a move to a single scheme, which is likely to be based on the existing RDEC.

Now is the time to act to improve your record keeping of R&D activities and costs to maximise and support your claim. Collating project details and costs in real-time may also increase the size of the company’s R&D claim, if you leave it to after the year end to collate all, you are more likely to forget aspects of projects.

KellyAnne Murtagh (k.murtagh@fpmaab.com) is senior manager at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.