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Book a MeetingWith a series of reforms to the R&D tax relief scheme having already taken effect and with more changes coming on 1 April 2024, it’s essential to know precisely what impact they’ll have on your company’s future claim.
These changes 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.
The table below provides a comprehensive overview of the changes in R&D tax relief rates over time, as announced in recent autumn statements and spring budgets.
Company Type | SME Scheme | RDEC Scheme | Merged Scheme | ||
---|---|---|---|---|---|
Up to 31/03/2023 | From 01/04/2023 | Up to 31/03/2023 | From 01/04/2023 | For accounting periods starting on or after 01/04/2024 | |
Profitable company | 130% uplift on costs = 24.7% net benefit | 86% uplift on costs = 21.5% net benefit | Headline rate 13% = 10.5% post-tax | Headline rate 20% = post-tax rate between 14.7% – 16.2% | Headline rate 20% = post-tax rate between 14.7% – 16.2% |
Loss-making company | Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy | Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy | 10.5% subsidy | 15% subsidy | 16.2% subsidy |
Loss-making R&D intensive company | N/A | Costs plus 86% uplift = 186 x 14.5% repayable credit = 26.97% subsidy | N/A | N/A | N/A |
Between 1 April 2023 and 31 March 2024, adjustments to UK R&D tax relief rates affect the amount your company can claim.
Relief for companies that claim through the SME tax relief scheme has decreased, whereas relief for companies that claim through the RDEC tax relief scheme has increased. The new rates will impact all qualifying costs on or after April 2023.
Before April 2023, companies claiming through the SME R&D tax relief scheme were able to increase the value of their R&D costs by 130% to enhance the tax credits they receive. However, from 1 April 2023, this changed; the enhanced R&D expenditure rate or, in tax law, the ‘additional deduction’ decreased from 130% to 86%.
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.
When your company breaks even, your R&D enhanced expenditure now has a 10% tax relief applied instead of 14.5%, resulting in an 8.6% relief rate available instead of 18.85% before April 2023.
When you’re a loss-making company, HMRC calculates your R&D tax relief 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 pay 25% corporation tax. Businesses seeing profits between £50,000 and £250,000 are 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 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.
From 1 April 2023 to 31 March 2024, an R&D-intensive SME refers to a company whose qualifying R&D expenditure accounts for at least 40% of its total expenditure. However, as the scheme merges on 1 April 2024, the threshold for R&D-intensive SMEs will also change. Moving forward, an R&D-intensive SME will be considered a company with qualifying R&D expenditure amounting to at least 30% of its total expenditure.
An R&D-intensive SME is 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.
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 1 August 2023.
The rate of the RDEC has grown 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.
For 1 Apr ’23 – 31 Mar’ 24
Total Qualifying R&D Expenditure (TQE): £1,000,000
TQE x New RDEC Rate
£1,000,000 x 20% = £200,000
Gross Credit Amount – New Corporation Tax
£200,000 – 25% = £150,000
Tax credit claim value =£150,000
Initially termed as a ‘potential merger,’ the Autumn Statement on the 22nd November confirmed the merging of the SME and RDEC tax relief schemes will go ahead. If implemented as scheduled, the merger will be effective for accounting periods on April 1, 2024.
The merged scheme will primarily follow the RDEC rules, emphasising the significance of R&D within a company’s pre-tax income. For larger businesses already claiming through the RDEC scheme, this ‘above-the-line credit’ approach will not entail a significant transition.
However, SMEs are advised to start planning for these changes sooner rather than later. Whilst this is the case, elements from the SME scheme are proposed to be incorporated, which could offer more favourable outcomes for all businesses undertaking R&D projects.
If you’d like to discuss this further, contact one of our experts today, who would happily take you through the changes.
To learn more about the merged scheme, read our full guide here.
Following the announcement in the Spring Budget 2023, restrictions on some overseas expenditures will now be effective from 1 April 2024. Businesses must proactively prepare for this imminent change if they haven’t already done so. It is crucial to take action now in order to stay ahead of the curve.
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.
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.
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.
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 count as qualifying R&D expenditures for both tax relief schemes (RDEC and SME), and the government has amended 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 1 August 2023. The draft guidance has now detailed exactly what this additional information is:
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.
From 1 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:
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.
EmpowerRD has redefined R&D tax credit claims with our people + platform model, blending expert guidance with technology. Our experienced team, including ex-HMRC, ATT-qualified, and AML-trained specialists ensures compliance and optimisation. With 1,200+ clients served, we’ve secured £200m+ in relief, demonstrating our commitment to efficient, effective R&D tax solutions. EmpowerRD delivers excellence in R&D claims, not just promising it.
If you have any questions on the recent and upcoming reforms, get in touch with one of our experts today.
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