The world of R&D Tax Credits can be confusing, but, if you’re in the loop, you’ll know about the range of changes being made in the coming months to the requirements for how you claim them and the requirements for being able to do so.
We like to keep our UK clients up to date about the ins and outs of of R&D Tax Credits, but there are cases where expert advice is best sought. In the interests of this, we’ve teamed up with our friends at MPA to bring you information on the updated requirements coming into effect on August 1st.
Let’s hear a bit more about these changes from MPA content machine, Kevin Muhirwa.
What are R&D Tax Credits?
R&D tax credits serve as an enticing incentive for companies involved in pioneering advancements. In the United Kingdom, these tax reliefs offer a valuable source of funding for businesses investing in the development of novel products, processes, or enhancements to existing ones. By leveraging this relief, your company can potentially reclaim a portion of its R&D expenditure in the form of tax credits. This can significantly reduce your tax liability or amplify your taxable losses. Regardless of your industry, if you allocate funds towards research and development, you may qualify for R&D tax credits.
As an overview, what are the changes being made?
During the Spring 2023 Statement, Chancellor Jeremy Hunt unveiled additional measures to provide R&D tax relief support for small and medium-sized enterprises (SMEs) that exhibit a strong focus on research and development (R&D) activities, despite incurring losses. This significant development is anticipated to impact approximately 20,000 SMEs in the United Kingdom. The new provisions are slated to take effect from 1st April 2023 and are projected to yield an estimated annual value of £500 million.
These changes will impact:
• Compliance changes
• How abuse will be tackled
• How much can be claimed
Under the revised guidelines, companies that operate at a loss while demonstrating a substantial commitment to R&D will have the opportunity to benefit from tax relief. Eligible enterprises falling into this category can claim £27 from Her Majesty's Revenue and Customs (HMRC) for every £100 invested in R&D endeavours. The classification of a company as R&D intensive hinges on the condition that its qualifying R&D expenditure accounts for 40% or more of its total expenditure. This enhanced scheme aims to provide valuable support to businesses engaged in intensive R&D activities, fostering innovation and growth across various sectors.
Is there anything new you can claim for?
The government has expanded the types of expenses that qualify for R&D activities. Now, the costs of datasets and cloud computing are considered eligible. This update acknowledges the growing importance of these components in supporting innovative research and development.
In addition, the government recognizes the vital role of mathematics in driving R&D efforts. To provide stronger support, the definition of R&D for tax reliefs will be broadened to include all branches of mathematics, including "pure maths." This change aims to clarify eligibility criteria and create an environment that encourages groundbreaking discoveries.
How is the Government seeking to improve compliance?
Effective April 1, 2023, it is necessary for companies to proactively inform HMRC about their intention to make an R&D claim. This notification should be submitted via a digital service within six months following the end of the relevant accounting period. It is important to note that claim notification will be required only if a customer has not made an R&D claim within the preceding three years, up until the day before the commencement of the claim notification period.
Starting from August 1, 2023, all R&D relief claims must be accompanied by a mandatory additional information form. This form will entail a breakdown of costs across qualifying categories and a comprehensive description of the R&D activities. Moreover, the form will require endorsement by a designated senior officer of the company, underscoring the company's commitment and accountability to the claim. These measures are designed to enhance transparency and facilitate a more thorough understanding of the R&D claim by HMRC.
Are there changes to overseas expenditure?
Yes, although the government has delayed these plans. The previously announced restriction on some overseas expenditures will now come into effect from 1 April 2024 instead of 1 April 2023. As an overview, the changes state:
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Where companies subcontract R&D activity to a third party, they will only be able to claim relief for that expenditure where that third party performs the work within the UK.
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Where companies incur expenditure on payments for externally provided workers, they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll.
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If a company subcontracts work for performance overseas, it would not be able to claim R&D tax reliefs on that expenditure – but it would still be able to deduct those costs from taxable profits in the normal way.
These changes are being brought in to help ensure the UK economy is benefiting from the tax relief as intended.
What’s next?
That’s not all the content we have for you from the team at MPA, we’ll be catching up with them later this month following the launch of their webcast covering all these changes and more from a panel of experts. If that peaks your interest, you can sign up here.
Until next time.