Changes to the Research & Development tax relief schemes (Spring 2023 Budget)

The government encourages R&D via two different schemes:

• Research and Development Expenditure Credit (RDEC) for large companies.
• “Enhanced expenditure’ scheme for small and medium enterprise (SME) companies

What are the changes to the R&D schemes?

Research and Development Expenditure Credit, a taxable expenditure credit previously paid at 13% will increase to 20% of expenditure from 1 April 2023.

Small and Medium Enterprise “enhanced expenditure” scheme, the additional deduction for qualifying revenue expenditure decreases from 130% to 86%. Meaning that each £100 spent is treated as £186 for tax purposes, rather than £230 from 1 April 2023.

The SME scheme which allows loss-making companies to surrender their loss relating to R&D in exchange for a payable tax credit will see this credit reduced from 14.5% to 10%. For example, a loss-making company with, say, £20,000 of qualifying R&D expenditure, will see its payable tax credit reduce from £6,670 to £3,720 as a result of these changes.

It was also announced that a new credit rate of 14.5% will also be available to SME loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit at the higher rate for qualifying R&D expenditure, instead of the new 10% credit rate under the existing SME scheme.

Legislation of new reforms

The government will legislate in the Finance Act 2023 to reform the R&D reliefs. The legislation will apply generally to accounting periods starting on or after 1 April 2023. The reforms include a requirement to provide additional information. This will apply to all claims made on or after 1 August 2023.

The changes include:

• The creation of two new categories of qualifying expenditure for R&D tax relief: data licences and cloud computing services.
• Mandating companies to inform HMRC of their intention to make a claim for R&D tax relief using a new digital form within 6 months of the end of the accounting period in which the expenditure is incurred. Allowing HMRC to perform more upfront compliance checks on new claimants. (Companies that have claimed R&D tax reliefs in any of the previous three years will be exempted from this requirement)

Other changes

The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023.

For detailed advice and guidance on either Research & Development scheme, please contact David Gillies at Friend Partnership.

You can call David on 0121 633 2007 or contact him by email at david.gillies@friendllp.com