The government is looking to reform Research and Development Tax Relief for accounting periods beginning on or after 1 April 2023 - what does mean for companies claiming?
The Research and Development (R&D) tax relief currently provides small or medium-sized enterprises an additional 130% deduction on qualifying expenditure under the SME relief scheme, with large companies able to claim a 13% R&D credit using the RDEC scheme.
With the government’s ambitious target to increase total investment in research and development to 2.4% of UK GDP by 2027, R&D tax relief will have a key role in supporting growth, innovation and productivity in the future economy. This is why they are now considering reforms to the R&D scheme.
The government has looked at a number of ways to support their policy while encouraging businesses to use the tax reliefs available, including:
- increasing R&D grants available through Innovate UK;
- introducing new measures to ensure greater transparency of R&D expenditure claimed through tax credits.
There are more proposed measures on the way that will qualify more expenditures, help refocus on innovation in the UK and tackle abuse of reliefs.
What is R&D?
R&D tax relief is a scheme that enables companies in the UK to claim back some of their research and development costs.
The main benefit of R&D tax relief is that it allows you to recover some of the money you spend on research and development (R&D) activities. These can include anything from buying equipment or paying for an expert to help with your project, through to employing people who work on new ideas for your business.
If you're spending money on developing products, processes or services using science, technology or engineering, you could be eligible for support.
What are the new R&D tax relief reforms?
There are three potential areas the government is looking to reform from 1 April 2023 and some of these changes would affect eligibility of certain costs.
Qualifying Expenditure
Expenditure on data licenses and cloud computing would qualify for relief, and the definition of R&D would be amended to remove the exclusion of pure mathematics.
Focus on UK Activity
Innovation in the UK is a key element of the new reforms, this means expenditure on subcontracted or externally-provided workers would only qualify to the extent that those worker’s earnings are taxed through PAYE.
The intention is to have employee skills and industrial know-how arising in and benefiting the UK, but it will make it more difficult for companies facing global competition for specialist talent.
Abuse and Compliance
In an effort to tackle the abuse of R&D tax relief, the government will likely be putting in additional steps for companies submitting a claim, for instance:
- All claims, in future, will have to be made digitally.
- Claims will have to break costs down across qualifying categories and provide a brief description of the R&D. Details of any agent who has advised the company on compiling the claim will also have to be provided.
- HMRC must be pre-notified of claims using a digital service within six months of the period to which the claim relates. There will be an exception if a company has already made a claim in one of the preceding three periods. There is a risk here that lack of awareness of the pre-notification requirement will mean an otherwise legitimate claim being denied.
- The time limit for making a claim will be extended to two years from the end of the period of account to which the claim relates.
How can DSA Prospect help?
Research and development is often underestimated and under claimed by small businesses. With these possible changes on the horizon, particularly the additional preparation work it will take to submit a claim, it’s important to make sure you’re working with a team that not only has considerable experience in making successful claims but can do so effectively.
Don’t wait to get in touch, reach out today to find out how we can help you with your claim.
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