R&D tax credits: How changes to the rules may affect your small business
Posted: Fri 15th Jul 2022
In November 2021 and April 2022, the Chancellor's Autumn Budget and Spring Statement laid out how the UK economy might recover from the disruption caused by COVID-19.
Within Rishi Sunak's plans were a set of new rules regarding research and development (R&D) tax relief, and how the R&D tax credit system must adapt to meet changing guidelines from April 2023.
With HMRC inspectors scrutinising R&D claims more closely than ever, it's vital that you understand the fine print and make sure your R&D tax adviser is doing everything they can to limit the chances of an enquiry.
In this blog, we give you an overview of how R&D tax relief laws will change from April 2023.
Changes to R&D tax credits from 2023
Qualifying expenditure expanded to include cloud computing and data costs
It's been confirmed that R&D tax credits will be reformed to include all costs associated with cloud computing and data as qualifying expenditure. Chancellor Rishi Sunak has clarified this will apply to both the SME and RDEC schemes:
"All cloud computing costs associated with R&D, including storage, will qualify for relief."
Qualifying expenditure will be expanded to include pure mathematics spending
Alongside the inclusion of cloud computing and data costs, the R&D tax credits initiative will further adapt in response to the growing volume of R&D underpinned by mathematical advances. As of 2023, qualifying costs for R&D tax relief will include pure mathematics.
Regarding the addition of eligible mathematic expenditure, the Chancellor explained:
"This reform will support nascent sectors where the UK has a comparative advantage, such as artificial intelligence, quantum computing and robotics, while also supporting strong sectors such as manufacturing and design."
HMRC will refocus R&D claim benefits to within the UK, notwithstanding several exceptions
The government is committed to recapturing innovation support from overseas and making the scheme more effective for businesses in the UK.
The November 2021 Autumn Budget put forward that, as of April 2023, claimants will no longer be able to recover spending on R&D activity that takes place outside the UK.
More recently, mitigating conditions have been placed on this guideline, with the recognition that there are some cases where it's necessary for the R&D to take place overseas.
Expenditure on overseas R&D activity can still qualify where there are:
material factors such as environment, geography, population or other conditions that are not present in the UK and are required for the research (for example, deep ocean research)
requirements set down in regulations or laws that the R&D must take place outside the UK – such as clinical trials
The RDEC scheme is set to become more generous, boosting the return of R&D tax credits for large businesses
Another likely change to R&D tax credit law is the modification of the R&D Expenditure Credit (RDEC) Tax Credit Scheme to make it more internationally competitive.
Sunak announced that, in autumn, the government will finalise whether to make RDEC more generous. As it stands, RDEC (10.5% of costs claimable) is less lucrative for companies than the SME Scheme (up to 33% of costs claimable), which is justified by the greater financial stability of those businesses that apply to RDEC.
Why is this being considered? The answer is simple: research shows that the RDEC Tax Relief Scheme yields better returns. As the Chancellor explains:
"For every £1 of tax relief claimed, it stimulates £2.40 to £2.70 of further R&D expenditure. In contrast, the SME scheme only stimulates £0.60 to £1.28."
HMRC demands for greater detail amid a crackdown on compliance
HMRC hasn't been shy in its declared attempt to stamp out fraudulent R&D tax credits, with the standard for evidence and accountability within claim submissions reaching new heights.
As well as making R&D tax credits more rewarding for UK businesses, the government will implement additional strategies to combat rising abuse of the scheme – which has become particularly prevalent in the SME R&D Tax Credit Scheme.
One of these is the mass recruitment of HMRC inspectors dedicated to throwing out fraudulent claims:
"The government announced in November the creation of a new cross-cutting HMRC team focused on tackling abuse of these reliefs."
In both financial and technical reports, HMRC will demand greater detail for all R&D claims from April 2023. This increased scrutiny aims to rid R&D tax credits of reported costs that don't actually qualify, as to fight overinflated claims.
Tackling the new rules as a small business
These new rules won't cause problems for experienced R&D specialists. But for accountants who lump R&D claims in with general bookkeeping, they do present a problem.
Naturally, more in-depth financial and technical reports take longer, and accountants who are already spread thin may not have the time to produce the necessary detail.
But even for accountants that aren't short of time, a surface-level proficiency in financials isn't going to cut it. An understanding of complex law, as well as expert knowledge of R&D expenditure, will prove fundamental in satisfying HMRC inspectors and avoiding an enquiry when filing your R&D tax credits.
How Claim Capital can help
Claim Capital's team of R&D tax specialists have over 25 years of technical experience in delivering successful R&D claims. As an authorised HMRC agent, changing legislation is always at the forefront of our attention.
If you're wondering whether any of the new rules raised in this blog will affect your R&D tax credit claims moving forwards, it's best to get ahead and talk it through with one of Claim Capital's R&D tax specialists.
Even though these laws won't come into force until April 2023, Claim Capital may be able to advise you on how to pre-empt these changes, and make sure you can claim as much R&D tax relief as possible in the future.
To speak with an R&D tax expert, schedule a free consultation