R&D Tax Relief Incoming Changes – April 2023

Inclusion of cloud and data costs from April 2023

The UK government announced upcoming changes to its research and development (R&D) tax legislation, aimed at encouraging and supporting innovation in the country. One of the more significant changes is the inclusion of cloud computing, data costs and pure mathematics within R&D tax claims, which is expected to benefit a wide range of businesses, particularly those in the tech and digital sectors.

The change, which will come into effect for year ends starting after April 2023, means that companies will be able to claim tax relief for the costs incurred in purchasing, renting or using cloud computing services, as well as costs related to the purchase and processing of data. This is a welcome update to the previous legislation, which did not include these elements in any category of qualifying expenditure and so were not eligible costs.

This change is particularly important as cloud computing has become increasingly prevalent in the modern business environment. More and more companies are using cloud computing to store, process and analyse data to develop new products and services. By allowing these costs to be included in R&D tax claims, the UK government is providing an important incentive for businesses to invest in innovative technology and stay competitive in the global market.

Don’t forgetAs with all R&D qualifying expenditure, it is vitally important to thoroughly analyse these costs to establish the proportion of which they directly contribute to the overcoming of technical uncertainties.

The change has been welcomed by a wide range of industry bodies and experts, who see it as a positive step towards encouraging innovation and growth in the UK economy. The technology sector, in particular, is likely to benefit significantly, as cloud computing and data processing are at the heart of many of the industry’s most cutting-edge projects.

The inclusion of cloud computing, data and hosting costs in R&D tax claims is a welcome and important update to the UK’s R&D tax legislation. By providing an incentive for businesses to invest in innovative technology, and simplifying the process of claiming tax credits, the UK government is taking an important step towards supporting growth and innovation in the country’s economy.

Subcontracted R&D expenditure to be tightened

The government is also making changes to R&D tax relief rules that will affect companies who conduct R&D activities abroad. Under the new regulations, companies based in the UK but with R&D teams overseas will not be able to include these subcontracted costs within their R&D claims unless under specific circumstances. This means that the government will no longer be footing the bill for such activities which were previously allowed under the generous SME scheme. While this change will save the government money, it will adversely affect many UK companies that subcontract their R&D overseas and may make R&D collaboration between the UK and other countries less appealing. 

Subcontracted R&D activities must be performed in the UK and EPW’s (externally provided workers) must be subject to UK PAYE in order for the expenditure to qualify. However, under certain circumstances expenditure on overseas subcontractors may qualify when the necessary conditions (location, environment, legal requirements etc) are not present in the UK. If it is unreasonable for this R&D to take place in the UK due to the lack of these conditions then the expenditure may qualify.

This update has now been delayed until April 2024. From accounting periods starting on or after 1st April 2024, expenditure incurred on overseas subcontractors is no longer a qualifying cost – so double check your calculations or involve a specialist!

R&D relief rates are changing

As of 1 April 2023 there will be a number of significant changes to the R&D tax relief rates which will affect the amount of relief that you can claim. 

Relief is available for SMEs under the R&D tax relief regime, which offers an enhanced corporation tax deduction on a percentage of qualifying R&D costs. This is a valuable incentive for small and medium-sized enterprises (SMEs) to invest in research and development. Loss-making SMEs may opt for an R&D tax credit, which allows them to receive a cash payment in return for surrendering R&D-related losses.

In addition, an R&D expenditure credit (RDEC) is available, which primarily targets larger companies but can also benefit SMEs in certain circumstances. The RDEC scheme uses a different method of calculating corporation tax relief on R&D expenditure, but is effectively a taxable credit that may be used to offset liability to UK corporation tax or, in some circumstances, claimed as a cash payment.

From 1st April 2023 the SME R&D enhanced deduction will decrease from 130% to 86%, while the SME R&D credit rate will decrease from 14.5% to 10%. In contrast, the RDEC credit rate will increase from 13% to 20%, making it a more attractive option for SMEs and larger companies alike.

Importantly, in the latest Spring Budget – the chancellor announced that SME loss making R&D Intensive Companies (40% or more of total expenditure on R&D) will receive 14.5% tax credit of overall expenditure and enhancement rather than 10% for non R&D intensive companies.

taxrel

R&D claim pre-notification required

If your company is considering making an R&D claim for the first time, or has not made an R&D claim in any of its previous three accounting periods, it will now be subject to a new online pre-notification requirement. 

This means that you must inform HMRC of your intention to make an R&D claim, including the R&D adviser you’ll be using, within six months of the relevant accounting period’s end. However, if the full claim has been submitted within the six-month deadline already then there is no need to submit the pre-notification. This new measure is only relevant for first-time claimants or those who haven’t made a claim in the previous 3 calendar years. Prospective claimants should consider whether any of their projects and upcoming expenditure may qualify for R&D tax relief. If so, they may want to submit a pre-notification just in case to ensure they meet the new requirement.

R&D Additional Information Form

Moreover, making an R&D claim will now require the provision of further additional information form to HMRC, including details of the R&D project, the costs involved, the workers engaged, and details of the agent who helped prepare the claim. Additionally, the claim itself will need to be endorsed by a named senior officer of the claimant company. For more information on the specific details required in the additional information form.

If you think you may be eligible to make a claim for R&D tax credits, then please click the button below and we can help guide you through the process.