Budget: R&D reforms and additional support for R&D intensive SMEs
Additional targeted support for R&D intensive SMEs announced and an update on the timing of wider reforms to the R&D tax relief regimes.
R&D tax reliefs in the Budget
The Chancellor has announced the introduction of additional targeted relief for loss making research and development (R&D) intensive small and medium sized enterprises (SMEs) to counteract some of the impact of the reduction in R&D tax relief rates that will apply from 1 April 2023. There were also updates on the timing of previously announced changes to the R&D tax relief regimes and the ongoing review of the R&D tax relief regimes, including the recent consultation on a single simplified R&D tax credit regime. In respect of the additional information requirements these changes will now apply for all claims filed from 1 August 2023 which will accelerate the application of these requirements for a number of claimants. The previously announced overseas restriction will now apply from 1 April 2024 rather than 1 April 2023 so that the changes can be considered in the wider context of a single R&D regime.
Additional targeted relief for R&D intensive SMEs
The Chancellor announced the introduction of additional targeted relief for R&D intensive SMEs to counteract some of the impact of the reduction in SME R&D tax relief rates that will apply from 1 April 2023.
From 1 April 2023, the additional tax relief available for all SMEs will reduce from 130 percent to 86 percent with the cash R&D tax credit rate for loss making companies reducing from 14.5 percent to 10 percent. However, for loss making R&D intensive SMEs, the cash R&D tax credit rate will remain at 14.5 percent. R&D intensive SMEs are defined as having qualifying R&D expenditure that constitutes at least 40 percent of the company’s total expenditure. To prevent manipulation of the intensity ratio, the R&D expenditure and total expenditure of connected group companies will also need to be aggregated when calculating the R&D intensity ratio.
This change will apply from 1 April 2023 and will be legislated in Finance Bill 2023-24 with draft legislation being published for consultation in the summer. Eligible companies will be able to claim once the legislation comes into effect by either delaying submission of their claim until the legislation comes into effect, or by amending their claim once the legislation comes into effect (normal time limits for making or amending a claim will remain in effect). Eligible companies will need to indicate whether they are an R&D intensive company via the additional information form which is being introduced for claims made from 1 August 2023.
Acceleration of additional information requirements
The previously announced additional information requirements will now apply to claims made from 1 August 2023, regardless of the accounting period end of the claim, rather than applying to accounting periods beginning on or after 1 April 2023. This change effectively accelerates the introduction of the additional information requirements.
A digital ‘Additional Information Form’ will need to be submitted alongside R&D claims submitted from 1 August 2023. The additional information requirements appear to be quite substantial and will likely result in a greater level of supporting documentation and information to be submitted alongside R&D claims. In particular, there is likely to be a significant increase in the number of project technical descriptions that are required to support claims along with the requirement to provide a named senior officer of the company responsible for the claim. The requirement will apply to each claimant company which could result in a large increase in supporting documentation where claims are made by multiple entities within a group. However, there may be scope to make alternative agreements with Customer Compliance Managers (CCM) in these instances to reduce the administrative burden, but it is unclear what flexibility a CCM will have to depart from what will be a mandatory legislative requirement.
Overseas R&D restrictions
The previously announced restriction on overseas R&D activities will now come into effect from 1 April 2024 rather than 1 April 2023. This is to allow the Government to consider the interaction of these rules with the proposed single RDEC credit regime that was the subject of a recent consultation. From 1 April 2024, expenditure on overseas R&D activities will generally no longer be qualifying. The exception to the general rule is where conditions necessary for the R&D are not present in the UK, and it would be wholly unreasonable for the claimant to replicate them in the UK.
Other changes from 1 April 2023
The previously announced changes in respect of the extension of qualifying expenditure categories to data and cloud computing and the extension of the definition of R&D to pure mathematics will continue to apply to accounting periods beginning on or after 1 April 2023. Companies that have not made an R&D claim in the previous three years will need to inform HMRC that they intend to make a claim within six months of the end of the accounting period to which the claim relates via a digital form.
In addition, there was confirmation that from 1 April 2023 the RDEC rate will increase from 13 percent to 20 percent. Also, the SME rate of relief will decrease from an additional deduction of 130 percent to 86 percent with the cash R&D tax credit rate for loss making SMEs reducing from 14.5 percent to 10 percent, with the exception of R&D intensive SMEs as outlined above.
Ongoing R&D tax relief review
Alongside the changes announced at the Budget, the Government confirmed that it will continue its ongoing review of the R&D regimes. This includes the potential to introduce a single merged R&D credit regime from 1 April 2024 (the subject of a recent consultation). The Government intends to publish draft legislation on the design of this scheme for technical consultation in summer 2023 and any changes will be announced as part of a future fiscal event.
In addition, HMRC have agreed to provide a more accurate estimate of the error and fraud associated with the R&D regimes to the Public Accounts Committee by summer 2023. This will be alongside a clear action plan to reduce error and fraud. Any further measures to combat error and fraud will be announced separately.
What should claimant companies consider?
There are a number of changes to the existing R&D tax relief regimes that are due to come into effect from 1 April 2023 with the potential for further changes from 1 April 2024. The announcements in the Spring Budget mean that these changes will now kick in at different times and may have significant impact on claims going forward. Claimants should start preparing for these changes to ensure that claims are compliant in the context of the new rules and the additional administrative requirements can be met from 1 August 2023. In the short term, companies should consider the timing of the preparation of their outstanding claims and ensure that they can provide the requisite supporting information to HMRC.