2023 R&D tax relief changes- All you need to know

Stay informed about the latest updates on R&D Tax Relief for 2023, as these changes significantly impact your business.

In the last budget, crucial modifications to R&D Tax Relief have come into effect, altering the amount of relief you’re eligible for, the qualifying costs, and the notice period required when submitting your claim to HMRC.

Hire a Tax Accountant

Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 983 8100
Monday to Friday 10am – 5pm

It’s imperative to account for these reforms in your future R&D Tax Relief submissions to avoid time-consuming inquiries that can delay your relief by several months and potentially strain your relationship with HMRC.

This blog post will provide an overview of the changes and the new reporting requirements that will take effect later this year. Understand what these changes mean for your upcoming R&D Tax Relief submissions.

If you have any questions or need assistance understanding how these changes impact your business, our R&D Tax Relief experts team is here to help. Leave us a message, and we’ll respond promptly.

Table of Contents

Updated Rates of R&D Tax Relief
What are the changes
New Reporting Requirements
Postponement of Removal of Relief for Overseas Subcontractors
Conclusion

Updated Rates of R&D Tax Relief

The availability of R&D Tax Relief for companies has undergone significant changes.

The SME R&D Tax Relief scheme has become less generous, while the Research and Development Expenditure Credit (RDEC) support has increased.

These new rates apply to qualifying expenditures incurred on or after 1 April 2023.

Decreased SME R&D Tax Relief for Enhanced Expenditure

The enhancement rate within the SME scheme has been reduced from 130% to 86%.

Enhancement is a fundamental aspect of the SME scheme, artificially augmenting the value of qualifying costs to generate a tax reduction or cash credit.

For some companies, the surrender rate, which determines the proportion of an enhanced loss that can be relinquished for cash credit, has also decreased.

Loss-making companies investing at least 40% of their total outgoings in qualifying expenditure can still access the current % surrender rate of 14.5%.

However, non-loss-making and loss-making companies investing less than 40% of their expenditure in qualifying R&D will now have a surrender rate of 10%.

This provision for loss-making SMEs heavily investing in R&D was unveiled during the March 2023 Budget Announcement.

What are the changes?

Here’s how these changes affect the relief available to companies based on their financial positions:

 SMERDEC
 Before 1 April 2023After 1 April 2023Before 1 April 2023After 1 April 2023
Loss-Making  33.35% Tax credit on qualifying expenditure (230% enhanced expenditure x 14.5% rate of tax credit)  18.6% Tax credit on qualifying expenditure (186% enhanced expenditure x 10% rate of tax credit)  10.53%  Tax credit on qualifying expenditure (13% rate of RDEC taxed at 19% rate of corporation tax)15%  Tax credit on qualifying expenditure (20% rate of RDEC taxed at 25% rate of corporation tax)
Profitable  24.7% Additional tax saving on qualifying expenditure (130% enhancement x 19% rate of corporation tax)  21.5% Additional tax saving on qualifying expenditure (86% enhancement x 25% rate of corporation tax)  10.53%  Additional tax saving on qualifying expenditure (13% rate of RDEC taxed at 19% rate of corporation tax)  15%  Additional tax saving on qualifying expenditure (20% rate of RDEC taxed at 25% rate of corporation tax)

SME rate changes and the impact of corporation tax increase
If your company is profitable, the reduced enhancement rate may be partially offset by the corporation tax increase.

Companies with profits exceeding £250,000 will now pay a corporation tax rate of 25%.

For companies with profits ranging between £50,000 and £250,000, the tax rate will fall somewhere between the current 19% rate and the new 25% tariff.

Consequently, if your company has profits exceeding £250,000, your SME R&D Tax Relief will now be worth 21.5% of your qualifying expenditure, up from 16.34%.

Rising RDEC Relief Rate
The RDEC rate is being increased from 13% to 20%.

Since RDEC is an above-the-line credit, it is subject to corporation tax, including the increased rate.

Depending on your company’s profitability, you can expect between 42% and 54% more tax relief if you claim RDEC.

Inclusion of Cloud, Data, and Mathematics Costs as Qualifying Expenditure
Certain cloud computing solutions and data licensing costs are now eligible for relief.

The government has also revised the guidelines set by the Department for Business, Energy, and Industrial Strategy (BEIS) that govern the R&D Tax Relief scheme. It now includes activities related to pure mathematics as qualifying development work.

Like other qualifying expenditures, these costs must be associated with activities directly contributing to resolving scientific or technological uncertainties.

Suppose you use a dataset or cloud computing service like AWS for qualifying and non-qualifying work. In that case, HMRC allows apportioning a ‘reasonable’ percentage of the costs to your R&D Tax Relief claim.

Costs associated with creating a dataset, including wages for involved employees, will be eligible for relief. Data licensing fees will also be eligible unless contractual terms allow you to publish, sell, or share the data with a third party.

These changes apply to financial periods commencing on or after 1 April 2023.

New Reporting Requirements

Starting from 1 August 2023, submitting your R&D Tax Relief claim requires providing more extensive information about your research and development work.

The new ‘additional information form’ is designed to help HMRC identify fraudulent and abusive claims. Please comply to avoid an automatic rejection of your claim.

Here’s the information you need to provide:

Technical Information
You must provide a detailed description of some or all the projects in your claim.

Your reports should address the following six questions:

1. What is the main field of science or technology?
2. What was the baseline level of science or technology you planned to advance?
3. What scientific or technological uncertainties did you face?
4. How did your project address these uncertainties?
5. Which scheme are you applying to, and how much are you claiming?

Number of Projects to Describe
The number of projects you need to describe depends on the projects you claim for. Here’s a breakdown:

Projects ConductedProjects to Describe  
1-3  All of your projects.  
4-10  At least 3, and enough to describe projects accounting for at least 50% of your total expenditure  
More than 10  At least 3, and enough to describe the latest ten projects if your qualifying expenditure is split across multiple smaller projects  

Financial Information
You need to provide a detailed breakdown of your qualifying expenditure, categorized into nine types of qualifying costs:

● Staff costs
● Externally provided workers
● Subcontractor costs
Software
● Consumable items
● Payments to participants of a clinical trial
● Data licence costs
● Contributions to independent R&D costs
● Cloud computing services, including storage*

Note: Cloud computing costs become eligible for accounting periods starting or after 1 April 2023.

You must also specify the amount of qualifying expenditure associated with each project.

Qualifying Indirect Activities
You must disclose the amount of your project’s expenditure allocated to qualifying indirect activities. Indirect activities support your development work without directly contributing to scientific or technological advancements. Examples include project management and analysis.

Expenditure on indirect activities cannot include cloud computing or data licensing.

Company Information
Lastly, provide specific details about your company, including:

● Your company’s United Taxpayer Reference (UTR) number
● Your employer PAYE reference number
● Your VAT registration number
● Your business type, such as its current SIC code
● Contact details for the main senior person responsible for your R&D claim
● Contact details for any agent who assisted in preparing your claim, such as your R&D Tax Relief specialist

It’s worth noting that HMRC uses SIC codes to target inquiries, so including the SIC code with your submission is essential.

Feel free to reach out if you need guidance on meeting these new claim requirements.

Claim Notification Form
If your company hasn’t claimed R&D Tax Relief at all or in the past three accounting periods, you must submit a Claim Notification form before filing a claim.

The form requires the following information:

● Your company’s UTR
● Contact details of the main internal R&D contact
● Contact details for any agents who assisted in preparing your R&D claim
● The agent reference number (if applicable)
● Start and end dates for the period of accounts
● Start and end dates for the accounting period you are claiming R&D Tax Relief for

The pre-notification should be submitted within six months of the end of your company’s accounting period, and you can submit it as soon as you begin the accounting period during which you will conduct R&D.

Postponement of Removal of Relief for Overseas Subcontractors

The government has postponed the removal of SME R&D Tax Relief on costs associated with subcontractors and externally provided workers (EPWs) based overseas until 1 April 2025.

This news will come as a relief to many startups and scale-ups that rely on offshoring to access cost-effective skills.

The delay will provide the government additional time to consider merging SME R&D Tax Relief and RDEC into a single scheme. A unified scheme would offer a flat relief rate regardless of the applicant’s financial position, similar to the current RDEC scheme.

The government recently consulted on the proposed merger and planned to announce the results at a future fiscal event, such as a budget statement.

Conclusion

We are now entering a period of unprecedented change in R&D Tax Relief. The heightened focus on compliance by HMRC is adding immense pressure on companies to ensure their claims are accurate and adhere to all current regulations.

If you have any questions about these changes or need expert assistance in preparing your upcoming R&D Tax Relief claim, our team of tax and technical specialists is here to support you. Get in touch, and we’ll respond within 24 hours.

Experlu Editorial Team
The editorial team at Experlu is comprised of seasoned financial professionals dedicated to providing high-quality content on accounting and finance. With a wealth of experience and diverse expertise, the team produces insightful articles that have established the Experlu blog as the UK's leading financial and accounting resource. The team includes accountants, auditors, and business advisors who stay updated with the latest industry developments. Their commitment to excellence ensures that Experlu remains a trusted source of information, helping readers stay informed about audit, business, finance, and tax matters.