Tightening the availability of R&D Tax reliefs

The government has announced changes to the availability of research and development (R&D) tax reliefs in response to an increase in fraudulent R&D tax credit claims.

The key measures that have been introduced are as follows:

• The enhanced R&D tax relief available for SMEs will be reduced from 130% to 86%

• The rate of the SME payable credit rate, which can be claimed for surrenderable losses, will be decreased from 14.5% to 10%. This reduces the cash value of SME relief from 33.35% to just 18.6% making it less attractive to surrender losses rather than carrying forward to set against future profits!

• The RDEC rate, which is the R&D scheme for large companies, will increase from 13% to 20%. This relief is subject to corporation tax which makes the relief worth 15% in cash terms at a corporation rate of 25%

• For accounting periods that straddle the date of these changes, they will only apply to the proportion of the R&D costs relating to the period after 1 April 2023

For accounting periods that commence after 1 April 2023, the following changes will apply:

• Relief for overseas activity will be restricted. Subcontracted R&D, contributions to independent research (R&D expenditure credit regime only), and the costs of externally provided workers (EPWs) will generally only qualify if the relevant activities are carried on in the UK.

• Companies will need to inform HMRC in advance if they plan to make a claim for R&D tax relief. This will need to be done using a digital service within six months of the end of the period to which the claim relates. Companies that have made a claim in any one of the preceding three calendar years will not need to pre-notify. Companies that file their R&D claims before the notification deadline will also be exempt from notification.

• R&D claims will need to be more comprehensive, and they will need to be accompanied by written reports. The narrative must include clear evidence of a company’s technological or scientific advancements, and it must document the uncertainties faced or how these have been overcome through the research.