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Upcoming Changes to R&D Tax Credits

Posted on November 4, 2022

From April 2023, there will be a number of changes to R&D Tax Credits. On the 20th of July 2022, HMRC published draft legislation for the scheme’s changes that were announced in the 2021 Autumn Budget. These changes will primarily affect businesses that are claiming under both the SME and RDEC scheme and will take effect for accounting periods that begin after the 1st of April 2023.

Qualifying R&D Expenditure reform

The first upcoming changes to the R&D Tax Credits scheme are in relation to the qualifying expenditure categories. They will be extended to include the costs of data sets and cloud computing, and also allow pure mathematics to qualify for the scheme and form part of the qualifying activities of the claimant. It is important to note that the term “pure mathematics” has not yet been defined in legislation.

Software costs generally already attract R&D Tax Relief, however up until this date no relief has ever been given for the cost of data sets or cloud computing. The Government now proposes to extend the definition, therefore making the scheme more inclusive. 

The legislation is also set to be amended to specifically allow the new Health and Social Care Levy (which takes effect from 6th April 2023) to be included in the qualifying components for R&D staff costs in the same way that National Insurance Contributions currently do.

Relief refocused back to the UK

One of the biggest upcoming changes to R&D Tax Credits is that the relief is being refocused back to the UK. This change comes in response to the scheme coming under scrutiny in terms of assisting the UK with its R&D goals; to boost UK R&D investment to 2.4% of GDP by the year 2027. 

The changes proposed are that relief for subcontracted work and the cost of externally provided workers will be limited to focus on activity undertaken within the UK, rather than overseas. There will be some exemptions where factors such as environment, geography, population or other conditions that aren’t available in the UK but are required for research will count, and also where there are regulatory or legal requirements for certain activities to take place in specific areas. 

Some examples of these exemptions that HMRC have outlined are deep ocean research and clinical trials, but they could also include medical-tech trials, international telecoms or technology that is designed for extreme environments not present in the UK. The legislation however does make it very clear that exemptions such as conducting R&D overseas to cut staff costs or because the suitable staff that were required were not available will not be an exemption.

Improving R&D Tax Credits compliance

The third upcoming change to the R&D Tax Credits scheme is to improve compliance and tackle abuse that the scheme has been subject to. 

The changes are that:

  • All claims either for a deduction or a tax credit will need to be made digitally (companies that are exempt from the requirement to deliver a Company Tax Return online will not have to do this)
  • A summary report will be required that outlines a breakdown of the costs across qualifying activities, and a brief description of the R&D will also need to be included.
  • Every R&D Tax Credit claim will also need to be endorsed by a named senior office of the company.
  • HMRC will need to be informed 6 months in advance that a claim is going to be made, this will need to be done using a digital service within 6 months of the end of the period to which the claim is relating to.
  • All claims will also need to include details of any agent that has advised the company with compiling the claim, this is in response to the rise of the number of new R&D Tax Credit firms across the UK.

Anomalies and unforeseen circumstances improvements

The overall maintenance of the scheme includes preparing for unforeseen circumstances and constantly finding ways to improve the scheme. The draft legislation includes:

  • Companies will be allowed to make or increase a claim for RDEC when HMRC makes certain types of assessments.
  • Companies will be allowed to claim RDEC instead of SME even if they have always previously claimed through the SME scheme.
  • The time limit has been amended for making a claim two years from the end of the accounting period it relates to, rather than 12 months from the filing date. This aims to prevent companies which don’t receive a notice to file because they either fail to register or notify HMRC that they are dormant.
  • When an SME within a group exceeds the size threshold, all companies in the group will retain their SME status for one year afterwards it has transitioned to an RDEC, under the current legislation, while the company itself will hold its status, other companies in the group will lose their SME status.
  • The scope of rules in the Self Assessment legislation will be expanded so that they can be used to recover overpaid SME payable tax credit, and RDEC to let HMRC recover such amounts where the taxpayer is at fault, despite taking reasonable care.
  • The level of national insurance contributions made by a company on its employees and its own behalf will be added to the calculation of a company’s staffing costs, and potentially its own payable credit cap. This will therefore affect the amount of R&D Tax Credit relief that it can claim.

Green Jellyfish helps businesses across the UK to claim R&D Tax Credits. Think you may be eligible? Contact us today to arrange a no-obligation phone call.