What is happening in the world of R&D relief?

In addition to changes with HMRC’s approach to compliance, a lot of legislative changes are being made. To a very large extent, we can track a lot of this activity back to the 2021 Spring Budget when the government announced a review of R&D reliefs. A consultation document was published in March 2021 and a follow up document published in November 2021. The November R&D Report document contained the following main proposals.

• The categories of eligible expenditure would be updated to include expenditure on licences for data sets and for cloud computing costs.
• The reliefs would be refocussed towards R&D activity undertaken in the UK.
• All claims for R&D relief would have to be made online (except for companies exempt from online filing).
• More information would be required to support R&D claims.
• Claims would have to be ‘endorsed’ by a named senior officer of the company.
• Companies would need to notify in advance their intention to claim R&D relief.

Draft legislation covering those proposals was published on 20 July 2022. Then politics rather got in the way for a while.

In November 2022 the new Chancellor, Jeremy Hunt, delivered an Autumn Statement during which he announced his intention to cut the rates of R&D relief for SMEs while increasing the R&D expenditure credit (RDEC) rate. The legislation for these rate changes was passed in the hastily enacted Finance Act 2023. None of the other changes that had already been announced (and draft legislation published) were included in this Finance Act. These, we were told, would still proceed as planned, but would be included in a Spring 2023 Finance Bill.

In January 2023 the government published another consultation, this time looking at a possible single R&D scheme. The idea would be to merge the two existing reliefs into a single scheme, most likely an 'above the line' relief like the existing RDEC. This idea of a single scheme was mooted in the March 2021 consultation but didn’t feature in the subsequent R&D Report (November 2021).

Finally, we had the Spring Budget on 15 March 2023 where yet more changes were announced. In fairness, these are better described as ‘tweaks’, rather than new proposals.

So, what is changing when? There are currently three dates that practitioners need to be aware of:

The rate changes (with the exception of the credit rate for the newly announced R&D-intensive SME) are already enacted in the Finance Act 2023. Hopefully we won’t have to wait too long for the other provisions.

• The rate of additional deduction for SMEs is cut from 130% to 86%.
• The rate of payable credit for SMEs is reduced from 14.5% to 10%.
• A new category of R&D-intensive SME will be created that will continue to receive payable credit (if relevant) at 14.5%.
• The RDEC rate increases from 13% to 20%
• The eligible R&D expenditure categories are extended to include payments for data sets and cloud computing services.
• The guidelines on the meaning of R&D are updated to include advances in pure maths as being an advance in science.
• Companies will need to formally notify HMRC of their intention to claim R&D relief.

The advance notification requirement, the changes to include expenditure on data sets and cloud computing, and the inclusion of advances in pure maths as being an advance in science are for accounting periods starting on or after 1 April 2023. The other changes relate to expenditure incurred on or after that date.

From 1 April, therefore, SMEs will be getting significantly less relief than they are used to receiving under the SME regime for their R&D expenditure. The benefit received by SMEs claiming under the RDEC scheme (which they might use where they have subsidised expenditure) will, however, go up slightly.

All of this has to be considered in the context also of the changes to the corporation tax (CT) rates. From 1 April 2023, we move back to a two-tier CT rate system with marginal relief for companies with profits between the upper and lower profit limits. The lower limit of profits is only £50,000, so quite a few SMEs are likely to be claiming marginal relief.

We haven’t seen the draft legislation yet for the new category of ‘R&D-intensive SME’. But it seems these will be SMEs whose eligible R&D expenditure is at least 40% of their total tax deductible expenditure for the year.

Companies filing R&D claims on or after this date will also need to file an additional information form before, or at the same time as, the CT600. The original intention was that this form would apply to claims for accounting periods starting on or after 1 April 2023. It will now apply in respect of any claim filed on or after 1 August, regardless of the period to which the claim relates. A company filing a claim on 1 August for the year end 30 September 2022, for example, will now have to submit an additional information form. I suspect there will be a rush of claims being filed before 1 August.

• Restrictions on overseas R&D expenditure will be introduced. This was originally scheduled to apply for expenditure incurred on or after 1 April 2023 but has now been delayed for 12 months. Apparently, this is to allow consideration of how the provisions will apply in the context of the proposed single R&D scheme.
• It was clear from the consultation on the possible single R&D scheme, which closed on 13 March, that the government wanted to introduce the change from April 2024. My own view, shared by others, is that this is completely unrealistic, so I hope we will see this delayed in order to allow for a more carefully planned transition.

As I say, there are a lot of things changing in the R&D legislation and I wouldn’t be too surprised if there was more to come. We will almost certainly see the two schemes merged into one. I just hope that the change is well planned and not rushed.

The R&D relief schemes are a valuable part of the governments efforts to grow spending on R&D in the UK. Changes should be made carefully to ensure the reliefs achieve a clear policy objective.

David O'Keeffe BSc FCA CTA

March 2023