As of 1 April 2023
Changes to the R & D Expenditure Credit rate
As part of the Autumn Statement in November 2022, the Government announced changes to the rates of R&D tax relief. These affect current claimants of R&D tax relief under both the SME and R&D expenditure credit (RDEC) regimes and apply to expenditure incurred on or after 1 April 2023.
For expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, This measure also reduces the rates in the R&D tax relief for SMEs. The SME additional deduction rate will be reduced from 130% to 86%, and the rate of the SME payable credit rate which can be claimed for surrenderable losses will be decreased from 14.5% to 10%.
For further information please visit https://www.gov.uk/government/publications/research-and-development-rd-tax-reliefs-reform/reforms-to-rd-tax-reliefs
Changes to qualifying subcontractor labour
One of the most fundamental changes in the Autumn Budget was to refocus the relief provided to activities performed in the UK. As such, subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work undertaken in the UK. The new rules expand the categories of qualifying expenditure to include data licences and cloud computing to better reflect developments in technology and the different ways that cutting edge research and development is now undertaken.
Preventing abuse of the R&D tax relief for SMEs
- To help prevent abuse of the research and development (R&D) SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D tax credits will be capped at three times its total Pay As You Earn (PAYE) and National Insurance contributions (NICs) liability.
- HMRC has identified and prevented £300 million of fraud linked to this relief and this change will help to address similar abuses in future.
- The R&D tax reliefs, including the SME relief, are designed to encourage innovation. Their success is shown by a recent HMRC stud which found that for every £1 of tax forgone £1.53 to £2.35 of R&D is stimulated.
- £1.8 billion of support has been claimed so far for 2016-2017, up from £350 million in 2010. This supports the government’s aim of seeing UK spending on R&D reach 2.4% of GDP by 2027.
Why is a change needed?
- While R&D tax reliefs are effective, HMRC has identified (and prevented) fraud attempts on the SME payable tax credit, worth £300 million in total. In these cases, companies were set up to claim the cash available through the payable credit even though they have no legitimate R&D activity. HMRC also identified structures set up deliberately to claim the payable tax credit despite having no or little employment or activity in the UK.
- From April 2020, the amount of payable credit that a qualifying loss-making business can receive through the relief in any one year will be capped. The cap will be three times the company’s total PAYE and NICs liability for that year.
- This will deter abuse because fraudulent companies typically do not employ many people or pay PAYE and NICs. The cap will therefore ensure that the relief goes to companies that have a real UK presence.
- Close to 95% of companies currently claiming the payable credit will be unaffected.
- Nevertheless, the government recognises that some genuine companies with UK R&D activity may have low PAYE and NICs liability relative to R&D spend and therefore could be affected by this measure, despite the cap being set at three times their liability.
- In these cases, the companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits. The government will also consult on how the cap will be applied, to minimise any impact on genuine UK businesses.