Research & Development Tax Relief

Research and Development tax relief provides valuable financial support to businesses that carry out R&D. The Government is introducing changes from 1 April 2023 to the amount of tax relief that can be claimed, together with changes to the claim process.

Research and Development Tax Relief

 

Below is a summary of the key changes.

Large Company Regime – Research & Development Expenditure Credit (RDEC)

For expenditure on or after 1 April 2023 the research and development expenditure credit (RDEC) rate will increase from 13% to 20%

Small and Medium Enterprises (SME) Regime

For expenditure on or after 1 April 2023 the uplift of qualifying research & development costs will reduce from 130% to 86%.

  • In addition to this, for loss making companies who surrender the loss for a repayable tax credit, the tax credit is reducing from 14.5% to 10%.

Below is an example to illustrate this change:

Example – profitable company

Up to 31 March 2023 under the SME R&D regime, a company incurring £100,000 of qualifying research & development expenditure would be entitled to claim tax relief on an additional £130,000 of enhanced expenditure.

  • At the corporation tax rate of 19% this would be a reduction in corporation tax of £24,700.

From 1 April 2023 a company incurring £100,000 qualifying R&D expenditure would be entitled to claim tax relief of an additional £86,000 of enhanced expenditure.

  • at a corporation tax rate of 25% this would be a corporation tax reduction of £21,500,
  • or, at a corporation tax rate of 19% this would be a corporation tax reduction of £16,340.

Example – loss making company

In our above example if the company was instead, loss making, the loss can be surrendered for an research & development tax credit.

  • Up to 31 March 2023 R&D enhanced costs would be £230,000 (£100,000 plus £130,000 R&D enhancement). The company could claim an R&D tax credit of 14.5%, which equates to £33,350.
  • From 1 April 2023 the R&D enhanced costs would be £186,000 (£100,000 plus £86,000 R&D enhancement). The company could claim and R&D credit of 10%, which equates to £18,600.

Research & Development Intensive SMEs

  • If qualifying R&D expenditure is at least 40% of total expenditure then the company can claim the tax credit of 14.5% instead of the reduced 10%.

Other Research & Development Tax Relief Changes

Two new categories of expenditure qualifying for relief will be introduced:

  • costs of data licenses and
  • cloud computing services.

R&D expenditure must be “UK expenditure” ie performed in the UK. However, in limited circumstances qualifying overseas expenditure will be allowable, for example if conditions in the UK do not exist in order to carry out the R&D activity.

New Reporting Requirements

A new reporting requirement is being introduced.

For companies that have not made an R&D claim before or, where a claim is for a new project or, they have not made a claim within the last three accounting periods:

  • they will be required to inform HMRC online that they intend to make an R&D claim.
  • This must be done within six months of the accounting period end and must include details of the R&D advisor they are using.

All R&D claims have to be made digitally and include a breakdown of qualifying costs, together with a description of the project.

A claim has to be endorsed by a named senior company officer.

Shaw Austin are a firm of Chartered Accountants based in Chester supporting independent business throughout the UK. We take the headache out of business accounting and taxation by providing our clients with a personal service.

This article includes tax rates and allowances correct on date of publishing – tax rates and allowances can change from year to year. This is a general article to assist readers. Professional advice should always be taken in respect of your personal circumstances.

Published April 2023.

Research and Development Tax Relief