Proposed changes to the UK R&D tax relief schemes

Since 2020, several consultations on proposed reforms to the UK R&D tax relief regimes have been initiated by HMRC and the Government. The first batch of reforms is due to be initiated on 1 April 2023, however the March budget may include announcements of changes or delays to the proposed reforms. This document summarises the planned changes, some of which are still in active consultation so may be removed or altered prior to legislation being finalised.

R&D Pre Budget
Simon Symes
Published: 03 Mar 2023 Updated: 03 Mar 2023
Budget Business tax Tax

Evelyn Partners R&D Incentives Advisory team are participating in the consultative process and are in regular communication with HMRC and Treasury policy representatives. Should you wish to discuss any of the proposed changes in the context of a specific business, please reach out to any of the contacts listed.

Changes taking effect for R&D expenditure incurred from 1 April 2023

Extension to the categories of qualifying expenditure to include Cloud and Data costs 

As part of the aim to modernise the relief, expenditure on cloud services and the acquisition of data, to the extent it supports qualifying R&D, will be claimable. The change is widely welcome as a long-awaited extension to the previously narrow and outdated range of qualifying expenditure categories.

The change will benefit the majority of companies that have moved from the traditional model of purchasing software licences and investing in “on-premise” infrastructure, towards renting cloud services to support R&D. Allowing expenditure on data to facilitate R&D will benefit companies purchasing or renting large, often costly datasets to support R&D, for example in relation to training machine learning models.

Reductions in the rates of R&D relief for SMEs

The additional deduction of qualifying R&D expenditure (superdeduction) available for SMEs will reduce from an additional 130% to 86% and the cash credit available for loss making companies will reduce from 14.5% to 10% of the surrenderable losses. The relative reduction in R&D benefit resulting from these changes is dependent on tax rate and whether the company is in a profit or loss making position, however the reduction could be up to 50%.

The significant reduction in R&D relief for SMEs follows negative publicity around abuse of the relief, the number of perceived erroneous claims and analysis that suggested the SME scheme is less effective than the large company RDEC scheme in encouraging additional R&D investment.

Increase in the rate of R&D Expenditure Credit (RDEC)

The RDEC “above the line” credit rate will increase from 13% to 20%. RDEC is available to large companies that exceed the group staff, turnover or asset limits of the SME scheme, and to SMEs claiming R&D that was subcontracted to them by a large company or otherwise subsidised.

Removal of exclusions to mathematics as a qualifying advance under the BEIS Guidelines

The BEIS guidelines, which define R&D for Tax purposes, will be updated to make clear that activities relating to pure mathematics are now eligible for R&D tax reliefs. The guidance on this is still vague, however it is hoped that this will remove the ambiguity relating to claiming mathematical activities that support or underpin R&D projects, as is common in data science, machine learning, algorithm development and many other science and engineering disciplines.

Changes expected to take effect for accounting periods starting on or after 1 April 2023

Consultations are still ongoing into various proposed changes. It is expected, however, that much of the proposed legislation relating to these changes will be enacted  and take effect for accounting periods starting on or after 1 April 2023.  For companies with a 31 December year end, the legislation would first impact their 31 December 2024 year end claim.   The possible changes are summarised below.

Restrictions to overseas expenditure

With the aim of focussing the reliefs on R&D activities undertaken in the UK, companies will no longer be able to claim expenditure on externally provided workers (EPWs) and subcontracted R&D based outside of the UK. Based on current draft legislation, exceptions to the restriction will only be available where it would be considered “wholly unreasonable” to replicate the activities in the UK, however the exceptions are yet to be clearly defined.

As currently proposed, the restriction on overseas expenditure will have a significant impact on claimants that make use of an international workforce to support and augment UK led R&D projects.

Claim advanced notification

For accounting periods starting on or after 1 April 2023, some claimants will need to submit a Claim Notification form for their R&D claim to be valid within 6 months of the relevant accounting period end. Companies that need to supply a Claim Notification are first time R&D claimants and R&D claimants who have not made an R&D claim in any of the previous 3 calendar years.

The draft legislation states that the required information will include:

  • The Unique Tax Reference (UTR) number of the company
  • Contact details of main internal R&D contact at the company
  • Contact details of any agent involved in the R&D claim
  • Agent reference number, if available

Additional information required to support a claim

For accounting periods starting on or after 1 April 2023, for an R&D tax relief claim to be valid, the draft legislation requires a claimant to submit an Additional Information form. The Additional Information form should be accessible via the Government gateway from April 2023

While it has always been considered best practice to submit a claim report, including example project descriptions and detailing the claim approach, the new legislation will define what financial and technical information must be submitted. It should be possible to provide a separate R&D report in addition.  This will be advisable in many cases due to the limited information on the claim process currently captured by HMRC’s online form..

The proposed online form requires similar basic information to the advanced notification form, as well as:

  • A breakdown of the qualifying expenditure by the extended range of qualifying categories
  • Number of EPWs  who worked on the projects
  • PAYE scheme reference for those EPWs
  • Amount of costs claimed as qualifying indirect activities
  • Number of projects claimed for description of the projects under the usual 5 headings

Claimants will be required to submit project descriptions (in the online form) covering at least 50% of the qualifying expenditure, up to a maximum of 10 projects. If only 1-3 projects are being claimed, descriptions will need to be provide for every project.

Additional changes and ongoing consultations

On 31 January 2023 the House of Lords Committee published their report on research and development tax relief and the R&D expenditure credit, key observations and recommendations included:

  • Recent legislative changes are not effective in isolation and improvements to HMRC’s compliance capability are also required. This includes a more focused and targeted approach to identifying suspect claims, and greater expertise and resource within HMRC.
  • Fraud and error could be mitigated before claims are made if HMRC improved the support it provides to businesses. This includes both its guidance and communications to increase understanding of the scheme and expanding its existing Advanced Assurance process for claims by small and medium enterprises (SMEs).
  • That the Government introduces some form of transitional relief for expenditure on specialised resource, which is not available in the UK, particularly for contracts which have already been entered into.
  • BEIS and HMRC should work together on a new awareness campaign aimed at providing SMEs with accurate information about what is and, as importantly, what is not R&D.

Consultation on a single R&D scheme

On 13 January 2023, HM Treasury issued a consultation document seeking comments on a planned single R&D tax relief scheme to replace the separate SME R&D tax relief and large company RDEC scheme.

It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024. The new scheme is likely to be modelled on the RDEC scheme’s “above the line” credit model, in which the credit is accountable as additional income.  This has a positive impact on EBITDA and therefore a more tangible impact and greater likelihood of increasing R&D activities. 

Key discussion points on the single scheme include:

  • Whether SMEs should still have a higher rate of relief relative to large companies
  • In the event that R&D is subcontracted, which company should be able to claim the R&D relief
  • Which PAYE/NIC cap on the credit and cashback should be adopted

Additional support for “R&D Intensive” SMEs

The Chancellor confirmed that the Government will, ahead of the Spring Budget on 15 March 2023, work with industry to understand whether and how to provide further support for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D. The Government recognises the reform to the rates creates challenges for some R&D intensive SMEs and those in the life sciences sector in particular. The Government believes there is merit to the case for further support. Any further changes will be announced in the usual way, at a future fiscal event.

Approval code: NTAJ14032318

Please note

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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