R&D Tax Relief: Everything You Need to Know Since the Spring Budget 2023

Anyone who’s ever explored R&D will know that R&D Tax Schemes have changed a lot, particularly in recent years. The spotlight has turned-on companies to provide more evidence than ever for their R&D projects and how they qualify, with changes such as:

• Additional information and claim notifications forms
• HMRC increasing its compliance workforce
• Modernising the scheme
• Campaign to target fraud and abuse of the scheme

Whilst consultations and legislation still continues in areas, the below information helps to provide a summary of the known key changes and developments active now.

Changes from 1 April 2023

*It was announced that the previous 14.5% tax credit for loss making SMEs would remain for companies who spend 40% of their expenditure – providing a 27% net benefit.

Whilst the higher credit was applied to expenditure from 1^st April 2023, any accounting periods straddling this date will still need to meet the 40% requirement for the entire period. Put into context, this means a company with a June 2023 year end will need to have R&D expenditure between April-June 2023 that meets 40% of their total annual expenditure.

There have been some changes to specific areas of R&D which we explain further below.

Data Licence and Cloud Computing Now Included

Looking at the positives, one of the most exciting and modernised changes is the inclusion of data and cloud costs within eligible software costs – a long overdue change to the scheme. Companies can now claim data licences to access and use a collection of digital data as well as cloud computing, which includes:

• Data storage
• Hardware
• Operating systems
• Software platforms

Pure Mathematics Added to Scheme

Any activities seeking to advance in mathematics alone were previously not eligible. When we refer to pure mathematics, we’re talking about the exploration of new concepts, theories and techniques and any development of new models and symmetries. As of 1^st April 2023, these are now included in the R&D Tax Credits scheme and can be claimed against.

Overseas Restrictions Delayed

The scheduled restriction on overseas workers has been postponed and will not come into force until 1^st April 2024.

The idea is to incentivise UK based R&D, and therefore the restriction is designed to prevent companies from being able to claim any overseas activity in this area. That said, there will undoubtedly be exceptions for where it would be unpractical due to do so within the UK; due to either geographical or regulatory restrictions.

Additional Information Form

From 1 August 2023 all companies, regardless of their year-end, must submit an Additional Information form through HMRC’s online portal. Failure to do so will invalidate the claim.

Whilst project information across certain headings should already be provided, HMRC now require a certain amount of projects to be written up based on each project’s Qualifying Expenditure (QE):

• Claiming 1-3 projects – cover 100% of the total QE (all projects described).
• Claiming 4-10 projects – cover 50% of the total QE with a minimum 3 projects described.
• Claiming 10+ projects – cover 50% of the total QE with a minimum 3 projects described, if the QE is spread across multiple smaller projects then describe the 10 largest projects.

For company’s completing hundreds of projects a year, a lot more information is now required. Providing a write up on 2-5 representative projects will not suffice.

Aside from generating more administration, these changes will also require companies to now apportion all R&D costs on a project-by-project basis. Timesheets and tracking project specific external costs is preferred, but HMRC have yet to insist on this, allowing for all-encompassing costs to be given – for example for staff who work across multiple projects.

Rarely eligible sectors list released

With a wider compliance team and HMRC cracking down on fraudulent claims, they have released a list of sectors which are “rarely eligible” for the relief, and these include:

• Care homes
• Childcare providers
• Personal trainers
• Wholesalers and retailers
• Hospitality venues like pubs and restaurants

They have also stated that any projects that have already been conducted or are concurrently being conducted are “very unlikely” to be accepted.

Guidance on what projects are eligible

Even with the new guidance and information, it can be hard to recognise whether a project is eligible under the updated R&D Tax Credits scheme. Below we share some useful questions from a Chartered Accountant to ask yourself when considering the criteria:

• Does the project improve knowledge or understanding in the chosen field or company? For example, by developing new or improved systems, products or services. The answer needs to be yes.
• Does the project aim to overcome a scientific or technical challenge? The answer needs to be yes and will commonly be a technical challenge if you’re not a scientific based company.
• Could the problem be resolved by a competent professional in the field, qualified by experience or qualification? Just because it’s been dealt with by one route does not mean developing a new solution wouldn’t qualify.
• Is there a financial risk involved for the company claiming R&D? The answer needs to be yes.
• Have you received a grant for the R&D activity? If you have but it did not cover 100% of the cost, you may be able to claim still.

Future updates to be aware of: Consolidating the 2 R&D schemes into one

Currently, there are still two separate R&D Tax Relief schemes: SME and RDEC. It is the intention of HMRC to consolidate the two into one to look more like the RDEC scheme from 1^st April 2024, but this is yet to be confirmed. As part of this process, HMRC may also give greater focus on other areas such as; subcontracting R&D, utilising a PAYE/NIC cap and provide more support for R&D intensive companies.

If you have any R&D projects that you need to generate cash for up front, Moorgate Finance can help. To discuss any requirements further please call us on 01908 92 62 62.