HMRC’s R&D tax reforms 2023

With all these large sums of money being invested into UK Innovation, it has never been more important to make sure your business is aware of HMRC's UK Research and Development tax reforms.

What businesses need to know!

April is hurtling towards us, and that means HMRC’s raft of new requirements for Research & Development (R&D) tax relief claims are right around the corner. The Autumn Statement 2022 included reforms to the R&D tax relief scheme that will come into play from 1 April 2023. But what will these look like, and what should businesses and their R&D advisers be doing in preparation?

Changes relating to accounting periods beginning on or after 1 April 2023 (SME and RDEC)

Claims need to be more comprehensive All claims will need to be accompanied by a detailed report outlining R&D activities and how they mirror HMRC legislation. This narrative will need to include evidence to support an R&D project’s scientific or technological advancement, with specific detail on the obstacles and uncertainties encountered and attempted to overcome, and a breakdown of qualifying costs.

The report will also need to be submitted digitally. Advisers will have to put their name to the report, and all claims must be signed off by a senior officer at the claimant company. Businesses need to notify HMRC in advance From 1 April 2023, any company that has never submitted an R&D tax relief claim before must inform HMRC that they are considering a submission within six months from the end of the accounting period for which the claim relates. A business that has made a claim in the last three accounting periods does not need to notify in advance. A consequence of this new requirement is that new claimants will not be able to include the previous two closed tax years’ R&D projects within their first claim unless the necessary notification for the earlier period is made in time. If the company notifies HMRC but does not make a claim, they are not penalised in any way but they will need to re-notify when they are ready. The time period to actually make the claim remains at two years from the end of the accounting period.

There are still outstanding questions about how this notification process will actually work. We don’t yet know whether it can be submitted digitally, or even whether an adviser can send the notification on a client’s behalf. One obvious risk under the new rules is that businesses that do not get timely advice on claiming R&D tax relief could miss the deadline and lose out.

Changes relating to expenditure incurred on or after 1 April 2023 R&D rate changes On a positive note, in the Autumn Statement Hunt reaffirmed the government’s commitment to increase R&D spend to ￡20 billion by 2025. He announced increased generosity to the Research and Development Expenditure Credit (RDEC), whereby for expenditure on or after 1 April 2023, the RDEC rate is set to increase from 13% to 20%.

This is an after-tax increase from 10.53% to 16.2% for a company paying tax at 19% and an increase to 15% for a company paying tax at 25%. For small and medium-sized UK businesses utilising the SME scheme, with expenditure on or after 1 April 2023, the uplift rate on tax relief will fall from 130% to 86%, and the tax credit rate will drop from 14.5% to 10% for loss-making businesses.

All of this follows the recent increase in corporation tax for some companies (depending on the company’s profit), therefore companies with profits in excess of ￡250,000 will see little impact. Alongside the Chancellor announcing that the changes are to combat R&D fraud, we believe they are the first step in bringing the two separate schemes into line as a single RDEC scheme. All changes are for expenditure on or after 1 April 2023, so companies with accounting periods that straddle this date will see a mixed claim of old and new rates. Of course, it will be some time before we start making claims that are impacted by the change, the earliest possible being any claims for a period ending 30 April 2023.

Article courtesy of Catax marketing team.

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