Research and Development (R&D) tax relief has been part of the tax landscape since its introduction in 2000. The rules are not particularly intuitive so the regime is regarded by some as complex. Further changes announced in the Autumn Statement 2022 mean there is an increased potential to trip up going forward. Here is our guide to pitfalls and opportunities to watch out for:
- There are two R&D schemes, the scheme for small and medium-sized enterprises (SMEs) and the R&D expenditure credit (RDEC) and the impact of recent changes on a profitable company will vary by scheme. For a profitable company the benefit for every £1 expenditure incurred will increase by 6% (1) for the SME scheme and for the larger company RDEC scheme by 42% (2).
- For loss-making companies, the benefits for the RDEC scheme are the same as above but for the SME scheme there is a massive reduction of 44% (3). For companies, especially knowledge intensive scale ups relying (as they might have in previous years) on R&D tax credits to minimise their cash burn, this reduction could be a nasty surprise.
- SMEs can opt to claim under the RDEC scheme, which given the above can be advantageous, although there are additional restrictions on contractor costs under the RDEC schemes to consider, in addition to the RDEC scheme being available for subsidised expenditure. However, RDEC claims may also be reduced from 31 December 2023 where the effective rate of rate of the claimant is less than 15%.
- The above effective rates exclude the impact of the marginal rate of tax for companies with profits less than £250,000 but more than £50,000 which will now be 26.5%. Where there is more than one trading company in a group with common control these thresholds are also reduced. And in addition, R&D expenditure needs to be time apportioned over fiscal years. Very quickly, there are a set of considerations that can change the sums that can be claimed, so businesses relying on R&D relief need to reassess their assumptions. Using last year’s relief or credit as a proxy for future cash flows is just not wise.
- The costs that can be included in the claims are also changing (effective from 1 April 2023 as announced in Autumn Budget 2021), so that data licences and cloud computing can be included, but there are more limitations on non-UK expenditure.
- Pre-notification for claims is now required for new claimants or companies who have not claimed in the previous three accounting periods.
- Additional information will need to be supplied to support claims.
How we can help: We provide tax advice to our clients as part of our practical and integrated support for scaling and ambitious businesses. We don’t charge premium commissions for R&D claims and consider it to be a simple part of making your tax affairs complete, fair and to benefit from current legislation. Contact us on email@example.com if you want to know more.
(1) Calculated as 230% of qualifying expenditure attracting tax relief at 19% rising to 186% of qualifying expenditure attracting tax relief at 25%.
(2) Calculated as 13% of qualifying expenditure taxed at 19% increasing to 20% of qualifying expenditure taxed at 25%.
(3) Calculated as 230% of qualifying expenditure at a credit rate of 14.5% calling to 186% of qualifying expenditure at a credit rate of 10%.