R&D Tax Relief Update - August 2023

May 2023

Change is going on in the world of R&D tax relief with key drivers being:

• March 2023 Spring Budget announcing and implementing various changes which have been under consultation and discussion since March 2021
• Increased numbers of HMRC enquiries, challenging the validity and content of a submitted claim
• A consultation and draft legislation on the future introduction of a single merged R&D scheme

Key changes

With effect from 1 April 2023

• SME enhanced deduction reduced to 86% from 130% and credit from 14.5% to 10%
• R&D intensive SMEs will continue to receive any credits at 14.5%, although this is subject to a condition that at least 40% of expenditure must be qualifying for R&D tax relief
• R&D Expenditure Credit (“RDEC”) rate increased from 13% to 20%

With effect from 8 August 2023

Additional compulsory information form (online)

• All claimants for whatever year will need to complete the online form. The form requires prescribed information that supports the claims (on a project-by-project basis); it must also be endorsed by a named senior officer of the company and must include details of who has assisted with claim amongst other requirements

For accounting periods beginning on or after 1 April 2023

New areas of qualifying R&D:

• Qualifying expenditure relating to software and consumables will include data licences and cloud computing costs, with some exclusions
• Mathematics is now included in the definition of science

Refocus to support innovation in the UK

• The original draft legislation to restrict to UK activities for subcontracted R&D has been deferred one year and will be re-introduced from 2024 to allow consideration of how the provision will apply in the context of the proposed single R&D scheme.

New Advance Notification form for future periods

• A company must now tell HMRC that it plans to make a claim for R&D by submitting an online claim notification form
• It must do this by 6 months after the end of the period of account that the claim relates to if:

- It is claiming for the first time

- The last claim was made more than 3 years before the last claim notification period

Increased numbers of HMRC enquiries

HMRC has been under scrutiny for their failure to tackle fraud and abuse of R&D tax relief claims. Additional case officers have been drafted in specifically to increase the number of enquiries into R&D claims. The quantity and quality of the enquiries raised has caused concern within the professional community. HMRC themselves stated that they recognised the issues facing the taxpayer and that the training of their team is ‘ongoing’.

We have seen numerous letters of enquiries referred to us. It is apparent that the officers involved are often inexperienced, have misunderstandings of the legislation and have misinterpreted the guidance.

Getting an enquiry letter has proved challenging for legitimate claimants, as this can delay payment of tax relief whilst responses are given. It is also unclear whether the system can cope at the current pace without becoming ‘clogged up’ with the ongoing enquiries.

And the future…

HMRC recently closed its consultation on the introduction of a single R&D tax relief scheme. Draft legislation has been released to take effect potentially from 1 April 2024 which gives an indication of the proposed design of the new merged scheme, should it go ahead. The new proposals still include scope for R&D intensive SMEs to claim relief in the current manner. The government has stated that it has not yet taken a decision on whether to merge and intends to keep open the option of doing so from 2024.

Action to take now:

• Check that you are capturing all the information required for the online form, which is mandatory for all claims after 8 August 2023
• Check your forecasts/cash flow forecasts to ensure that they are using the new post 1 April 2023 rates. You will also need to prorate your calculations to either side of 1 April 2023 depending on your company year end
• Check and confirm whether you satisfy the conditions of being an R&D intensive SME.
• Be aware that Advance Notification is on its way – are you affected?
• Consider the location of your subcontractors – again change is on its way to restrict to UK only from 2024
• If you do get an enquiry letter from HMRC, contact your tax adviser immediately

We will continue to monitor changes and keep you up to date through our newsletters and websites.

If you have any questions with regards to the topics related to this article, please get in contact with our Business Tax Team.