Changes to R&D tax reliefs

The Research and Development (R&D) tax relief scheme applies to expenditure by companies on research and development.

There are two different tax relief schemes that companies can claim under:

• the Small and Medium-sized Enterprise (SME) scheme, available only to SMEs
• the Research and Development Expenditure Credit (RDEC) scheme, available to both larger companies and SMEs. RDEC is primarily aimed at larger companies, but it is sometimes claimed by SMEs. The RDEC is a credit that acts as a taxable receipt in calculating trading profits.

The main objectives of the R&D tax credit schemes review launched at Budget 2021 were to:

• refocus the relief towards innovation in the UK
• tackle abuse and improve compliance
• correct anomalies and ensure the reliefs operate as intended
• expand the categories of qualifying expenditure to include data licences and cloud computing
• expand the relief to cover mathematical advances in and of themselves (ie ‘pure mathematics’).

R&D tax reliefs have a key role in incentivising this investment by reducing the costs of innovation. The aim of the reform was to ensure that the reliefs remain up-to-date, competitive and well-targeted.

For expenditure on or after 1 April 2023 the changes are as follows:

• the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.
• the Small and Medium-sized Enterprise (SME) additional deduction rate will decrease from 130% to 86%.
• the SME credit rate for loss-making companies that are R&D intensive (companies spending at least 40% of their expenditure on R&D) will remain at 14.5% but
• the SME credit rate for loss-making companies that are not R&D intensive (companies spending less than 40% of their expenditure on R&D) will be cut from 14.5% to 10%.

Below are some examples showing the practical implications.

Example 1. An RDEC company spending £10,000 on qualifying expenditure.

A. If the amount was incurred before 31 March 2023

Rate of RDEC is 13% which gives an amount of £1,300 (13% of £10,000)

Corporation tax on RDEC at 19% gives a tax amount of £247 (19% of £1,300)

Net amount of RDEC benefit is £1,053 (£1,300-£247)

Net amount of benefit as a percentage of expenditure 10.53% (1,053/10,000) so a benefit of 10.53 pence per pound.

B. If the amount was incurred after 31 March 2023

Rate of RDEC is 20% which gives an amount of £2,000 (20% of £10,000)

Corporation tax on RDEC at 25% gives a tax amount of £500 (25% of £2,000)

Net amount of RDEC benefit is £1,500 (£2,000-£500)

Net amount of benefit as a percentage of expenditure 15.00% (1,500/10,000) so a benefit of 15 pence per pound.

For RDEC companies, the benefit from tax incentive for R&D expenditure incurred after 1 April 2023 will increase from 10.53 pence per pound to 15 pence per pound.

Example 2. A profitable SME spending £10,000 on qualifying activities

A. If the amount was incurred before 31 March 2023

Additional deduction is £13,000 (being 130% of R&D expenditure of £10,000)

Corporation tax savings at the rate of 19% is £4,370 being 19%x£23,000 (R&D expenditure £10,000 plus additional amount of £13,000).

Net amount of benefit as a percentage of expenditure 43.70% (4,370/10,000) so a benefit of 43.7 pence per pound.

B. If the amount was incurred after 31 March 2023

Additional deduction is £8,600 (being 86% of R&D expenditure of £10,000)

i) For SME paying corporation tax at the rate 25% the benefit is £4,650 being 25% of £18,600 (R&D expenditure £10,000 plus additional deduction of £8,600)

Net amount of benefit as a percentage of expenditure 46.5% (4,650/10,000) so a benefit of 46.5 pence per pound.

For profitable SME (that pays corporation tax at 25%) the benefit from tax incentive for R&D expenditure incurred after 1 April 2023 will increase from 43.7 pence per pound to 46.5 pence per pound.

ii) For SME paying tax at 19% the benefit is £3,534 being 19% of £18,600 (R&D expenditure of £10,000 plus additional deduction of £8,600)

Net amount as a percentage of expenditure 35.34 (3,534/10,000) so a benefit of 35.34 pence per pound.

For profitable SME (that pays corporation tax at 19%) the benefit from tax incentive for R&D expenditure incurred after 1 April 2023 will decrease from 43.7 pence per pound to 35.34 pence per pound.

Example 3. Loss making SME spending £10,000 on qualifying activities and the company is R&D intensive (ie a company is spending at least 40% of their expenditure on R&D )

A. If the amount was incurred before 31 March 2023

Additional deduction is 13,000 (being 130% of £10,000)

Credit rate 14.5% of 23,000 (R&D expenditure of £10,000 plus additional amount of £13,000) which given and amount of £3,335.

Net amount as a percentage of expenditure 33.35% (3,335/10,000) so a benefit of 33.35 pence per pound.

B. If the amount was incurred after 31 March 2023 (SMEs spending 40% of their expenditure on R&D)

Additional deduction is 8,600 (being 86% of R&D expenditure of £10,000)

Credit rate 14.5% of 18,600 (R&D expenditure of £10,000 plus additional amount of £8,600) which gives a credit amount of £2,697.

Net amount of benefit as a percentage of expenditure 26.97% (2,697/10,000) so a benefit of 27 pence per pound.

For a loss-making SME that is a R&D intensive company (ie a company spending at least 40% of their expenditure on R&D ), the benefit from tax incentive for R&D expenditure incurred after 1 April 2023 will decrease from 33.35 pence per pound to 27 pence per pound.

Example 4. Loss making SME spending £10,000 on qualifying activities and the company is not R&D intensive (ie a company is spending less than 40% of their expenditure on R&D

A. If the amount was incurred before 31 March 2023

Additional deduction is £13,000 (being 130% of R&D expenditure £10,000)

Credit rate 14.5% of £23,000 (R&D expenditure of £10,000 plus additional amount of £13,000) which gives a benefit amount of £3,335

Net amount as a percentage of expenditure 33.35% (3,335/10,000) so a benefit of 33.35 pence per pound.

B. If the amount was incurred after 31 March 2023(SMEs spending less than 40% of their expenditure on R&D)

Additional deduction of £8,600 (being 86% of R&D expenditure of £10,000)

Credit rate 10% of £18,600 (R&D expenditure of £10,000 plus additional amount of £8,600) which gives a benefit amount of £1,860

Net amount of benefit as a percentage of expenditure 18.60% (1,860/10,000) so a benefit of 18.6 pence per pound.

For a loss-making SME that is not a R&D intensive company (ie a company spending less than 40% of their expenditure on R&D ), the benefit from tax incentive for R&D expenditure incurred after 1 April 2023 will decrease from 33.35 pence per pound to 18.6 pence per pound.

The R&D claims submission process will also change. HMRC is introducing the following requirements:

From 1 August 2023, all claims must be made digitally with additional information provided to HMRC on a new digital form (submitted either in advance or alongside the claim).

The details of the project and expenditure will need to be provided in a prescribed format, with a sufficient number of projects and percentage of expenditure described.

The claims must include the details of the agents who have advised on the claim.

New entrants and companies who have not made a claim for three years, with accounting periods commencing on or after 1 April 2023, will have to notify HMRC, within six months of the end of the period to which the claim relates, that they are intending to make a claim.

Read the Statutory Instrument 293 of 2023.

Read the guidelines.

As before, these guidelines apply to both Part 3 Chapter 6 (RDEC) and Chapter 13 (the SME scheme) of the CTA 2009. S104Y(1) just applies to RDEC referring to S1041 CTA 2009 which applies to the SME scheme. The latter, through s1138 of CTA 2010, leads to s1006 ITA 2007 and it is that section under which the regulations are made.