Guide to R&D tax relief reforms in 2023

With a series of reforms to the R&D tax relief scheme due to take effect in April 2023, it’s essential to know precisely what impact they’ll have on your company’s future claim.

These changes will affect how much relief you can claim, the qualifying costs you can include, the information you’ll need to provide when submitting a claim, and how you submit a claim.

The far-reaching nature of these reforms means every business claiming R&D tax relief will feel the consequences. This guide looks at what is changing and how it might impact your R&D tax relief claim so you can feel prepared come April.

From April 2023, adjustments to UK R&D tax credit rates will affect the amount your company can claim.

Relief for companies that claim through the SME tax relief scheme will decrease, whereas relief for companies that claim through the RDEC tax relief scheme will increase. The new rates will impact all qualifying costs on or after April 2023.

Main changes to the R&D tax credit scheme

The SME scheme’s enhancement rate will decrease from 130% to 86% from April 2023

At present, companies claiming through the SME R&D tax relief scheme can increase the value of their R&D costs by 130% to enhance the tax credits they receive. However, from 1 April 2023, this is changing; the enhanced R&D expenditure rate or, in tax law, the ‘additional deduction’ will decrease from 130% to 86%.

The SME tax credit rate will reduce from 14.5% to 10%

Once enhanced, the cash benefit of an SME scheme R&D claim varies depending on whether you’re breaking even, loss-making or profit-making.

Breaking even

When your company breaks even, your R&D enhanced expenditure will now have a 10% tax relief applied instead of 14.5%, resulting in an 8.6% relief rate available instead of 18.85% before April 2023.

Loss-making company

When you’re a loss-making company, HMRC calculates your R&D tax credit by combining the enhanced R&D expenditure and trading loss with the new 10% tax credit rate applied instead of 14.5%, resulting in an 18.6% relief rate available instead of the old 33.35% before April 2023.Profit-making company.

To calculate the R&D tax relief as a profit-making company, first, deduct your increased R&D expenditure from your taxable profits. Then multiply that figure by the corporation tax rate to get your revised corporation tax bill.

The amount of money you save is calculated by subtracting the reduced corporate taxes bill from what it would normally be without the deduction.Starting from 1 April 2023, companies generating over £250,000 in profits will pay 25% corporation tax. Businesses seeing profits between £50,000 and £250,000 will be subject to a graduated rate ranging from the current 19% up to the new 25%.

If the enhanced R&D expenditure is higher than your taxable profit, the enhanced R&D expenditure becomes a trading loss, and a loss-making calculation applies. However, the new 10% tax credit rate must be applied instead of the old 14.5%.

To learn more about changes specific to SMEs, read our guide to SME R&D tax relief changes in 2023

While the SME scheme is set to become less generous from April 2023, there is a silver lining for R&D-intensive SMEs. In the Spring Budget, the government announced that a higher rate of relief for R&D-intensive SMEs will be introduced.

What is an R&D-intensive SME?

An R&D-intensive SME is a company with qualifying R&D expenditure that is at least 40% of its total expenditure.

How much will an R&D-intensive SME receive?

An R&D-intensive SME will be able to claim a higher payable R&D tax credit rate of 14.5% (rather than the reduced 10%).

This means that loss-making R&D-intensive SMEs will receive a cash credit of £27 for every £100 spent on R&D expenditure instead of the reduced rate of £18.60 available to non-R&D-intensive SMEs.

How will this be delivered?

As part of the existing SME scheme, companies will be able to indicate if they are claiming as R&D-intensive using a new digital ‘Additional Information’ form. The introduction of this form is set to take effect on or after 8 August 2023.

The Research and Development Expenditure Credit (RDEC) rate will grow from 13% to 20% from April 2023

The rate of the RDEC will grow from 13% to 20%. That’s a 42% increase in generosity (after tax) from 10.5% to 15%.

RDEC is an above-the-line credit, so, therefore, potentially subject to the new increased corporation tax.

New RDEC rate calculation

Following the announcement in the recent Spring Budget, the previously announced restriction on some overseas expenditures will now be effective from 1 April 2024 instead of 1 April 2023. Whilst this reform will not come into effect until 2024, businesses must start preparing for this change in 2023.

As of 1 April 2024, to be qualifying R&D costs, subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work done in the UK; unless it’s classified as qualifying overseas expenses.

What makes qualifying overseas expenditure?

To be deemed Qualifying Overseas Expenditure (QOE), expenditure on R&D conducted outside the UK must meet three criteria. All conditions need to be met for the expense to qualify.

• The first factor is that conditions necessary for R&D are not present in the UK.
• The second is that the conditions are present in the location where the R&D is undertaken.
• The third factor is that it would be wholly unreasonable to replicate the conditions in the UK.

You can find extra clarification on ‘conditions’ and ‘wholly unreasonable’ scenarios in the draft guidance, but here’s a helpful example of qualifying overseas expenditure offered by HMRC:

If the R&D involved placing sensors on active volcanoes, this clearly requires a condition (the presence of a volcano) that is not present in the UK and one that would be wholly unreasonable to replicate. And it is a condition that exists in places outside the UK. So this activity would be Qualifying Overseas Expenditure (QOE) if undertaken in a location where the necessary conditions arise.

Legal or regulatory requirements

HMRC has announced that certain activities could be considered qualifying overseas expenditures based on specific legal or regulatory requirements. For instance, they could be eligible if the activities have to happen in a particular country or according to recognised regulatory principles not obtained in the UK. 

For example, suppose a company produces a product that requires certain raw materials or ingredients only available in another country. In that case, the cost of travelling to that location to obtain the necessary resources could count as QOE. Similarly, if a business needs to meet specific legal requirements abroad to qualify for a foreign market or operate legally in that jurisdiction

Additionally, if a regulatory body decides that activity must occur in a particular country or imposes requirements that make that necessary, this is a regulatory requirement. For instance, if drug testing must be done according to a method agreed upon by a regulatory body and that body decides it must take place overseas, then this could qualify. Once again, you can find further clarity in the draft guidance.

From 1 April 2023, cloud computing services and data will count as qualifying R&D expenditures for both tax relief schemes (RDEC and SME) and the government is amending the Guidelines on the meaning of research and development for tax purposes to include pure mathematics in the definition of qualifying R&D activities.

Like all qualifying R&D expenditures, the costs must contribute to resolving scientific or technological uncertainty.

For data costs or cloud services utilised for various purposes, not just R&D, HMRC will accept a fair split of the expenses. A good example would be to calculate based on factors such as staff hours employed, number of licences acquired and proportionate storage allocated to R&D versus non-R&D activities.

To learn more about the addition of cloud computing, data and pure mathematics, read our latest FAQ.

All claimants must submit additional information from the accounting period starting on or after 8 August 2023. The draft guidance has now detailed exactly what this additional information is:

• VAT number.
• Contact details of the main internal R&D contact at the company.
• Contact details of any agent working on the claim.
• Qualifying expenditure under the following categories:

1. Employee costs.
2. Externally provided workers.
3. Contracted out R&D.
4. Software.
5. Consumable Items.
6. Payments to participants of a clinical trial.
7. Data licence (for accounting periods starting on or after 1 April 2023).
8. Cloud computing services (for accounting periods starting on or after 1 April 2023).
9. Contributions to independent R&D costs (RDEC only).

• Show the amount of the above that is qualifying indirect activities (QIAs).
• Show the number of projects claimed for.
• Descriptions of the projects under 5 headings:

1. What is the main field of science or technology?
2. What was the baseline level of science or technology that you planned to advance?
3. What advance in that scientific or technical knowledge did you aim to achieve?
4. What scientific or technological uncertainties did you face?
5. How did your project seek to overcome these uncertainties?

• For 1 to 3 projects, the company will need to describe all projects, covering 100% of the qualifying expenditure.
• For 4 to 10 projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described.
• Show the number of EPWs who worked on the above projects.
• PAYE scheme reference for those EPWs (suggesting that HMRC expects to see a linked PAYE reference for any costs to be accepted as EPW costs).

This will have to be submitted digitally through a government web form, known as a g-form, which is set to go live in April 2023 on HMRC’s website.

To learn more about the new additional information form, read our latest blog.

From 8 August 2023, some companies will have to submit a claim notification to ensure their R&D tax credit claim is valid. Not everyone is required to submit a notification. HMRC has proposed that it should be mandatory for:

• Companies planning to submit R&D tax claims for the first time.
• Companies that have not submitted a claim for 3 years or more.

Claim notification forms must also be submitted through a g-form, set to go live on 1 April 2023, on HMRC’s website.

To learn more, read our quick, easy guide that covers every question you may have about the claim notification.

We’re here to help. Over 1,000 UK companies have trusted EmpowerRD’s R&D platform and specialists to help them build optimised, compliant R&D tax claims. Please get in touch with one of our experts today if you have any further questions.