QUESTION: I have been including R&D costs on my corporation tax return for a few years but have never submitted any details about the work to HMRC, can I continue to do this?
ANSWER: In his 2022 autumn statement, the Chancellor announced changes to the R&D Tax Credits system for UK businesses, affecting both SMEs and large organisations from April. The changes to R&D Tax Credits reflect a major change in the approach to dealing with research and development in the UK.
One of the main changes are that the rates will be rebalanced so that businesses claiming under the R&D SME scheme will receive a lower rate of tax relief, while those claiming R&D Expenditure Credit (RDEC) will secure more generous rates. The R&D changes also emphasise a strong drive from the government to tackle abuse and improve compliance.
The changes from April 2023 increase the rate of tax credit available for companies undertaking qualifying R&D and claim RDEC. Mostly aimed at larger companies, RDEC can also be claimed by SMEs in certain circumstances. RDEC is a separate credit, brought into account as a taxable receipt when calculating trading profits. The previous general rate was set at 13 per cent of the qualifying R&D expenditure. The changes introduced in April 2023 increases this rate to 20 per cent, which is obviously a significant increase and will benefit all companies claiming this relief.
The changes also reduce the rates of R&D tax relief available for SMEs, reducing the SME additional deduction rate from 130 per cent to 86 per cent. Furthermore, the rate of the SME payable credit rate which can be claimed for surrenderable losses is to be decreased to 10 per cent (from 14.5 per cent).
However, if an SME’s qualifying expenditure is at least 40 per cent of their total expenditure, they will be classed as R&D intensive and able to claim a higher payable credit rate of 14.5 per cent for qualifying R&D expenditure.
From April 2023, R&D claims will need to be more comprehensive, and they will need to be accompanied with written reports. Narrative must include clear evidence of a company’s technological or scientific advancements and it must document the uncertainties faced or how these have been overcome through the research.
There will also be an additional information form that will need to be filed by in advance of filing your company’s corporation tax return. This came into effect on August 8 2023. As part of the changes, paper returns will no longer be accepted by HMRC. All claims are to be made digitally using compatible software.
Advance notification to HMRC of R&D claims is potentially one of the most significant changes that were introduced from April 1 2023. Any company that has never submitted a claim will be required to inform HMRC if they are considering a claim within six months from the end of the accounting period on which the claim relates. Companies that have made a claim in the previous three accounting periods will not be required to notify HMRC in advance.
Historically a company could decide to make a claim for R&D and they were able to make the claim for the previous two years providing they were within the window to make an amendment to their corporation tax return. Now, where a company has not previously made a claim in the previous three accounting periods, they will not be able to include R&D expenditure occurred within the previous two accounting years as they could before.
These changes mean that it is vital to consider any potential R&D claims as soon as possible. Companies should be keeping detailed records of all projects, in case they qualify for R&D. Firms should also consider if HMRC should be notified of any existing projects. Moving forward, you should consider when an advanced notification is required. If in doubt, it is always worth notifying HMRC, even if it doesn’t result in a future R&D claim.
:: Shane Martin (s.martin@fpmaab.com) is tax director 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
