3 R&D Tax Credit changes for 2023
Are you up to date with the latest R&D guidelines?
R&D Tax Relief is the bread and butter of successful businesses. Tricky and complex, yes. However, companies that make the most of this type of tax relief scale up quicker and faster than companies that don’t. But here’s the thing, as of April 2023, R&D Tax Credits face a change.
With the latest draft legislation released, the changes to R&D tax relief are essential to know for the upcoming business years. How else can you plan for the future? Do you know how much tax relief you’ll receive? Do you know what still qualifies?
We’re here to run you through the latest iterations of R&D changes that will come into play from April 2023.
The problems of applying for R&D Tax Credits
We’ll get to the latest changes in a moment because there’s something that needs to be said.
R&D Tax Credits are complicated
They’re incredible assets to companies breaking new ground, trying to create new technologies, or searching for simpler solutions to old problems. This tax relief sparks innovation and rewards progress. But claiming R&D Tax Credits can be troublesome.
Without experience dealing with R&D guidelines, businesses often fall prey to the same mistakes:
Businesses don’t realise that they can claim tax credits
The full amount of tax relief is not claimed due to guideline uncertainty
Incorrect or incomplete documentation submitted alongside a claim
So before we cover the R&D Tax Relief changes, let’s briefly cover how a business can solve these three common problems.
Claiming R&D Tax Credits
You might think that R&D tax credits are all about laboratories and cutting edge equipment. But you’d be wrong. You could be missing out on R&D Tax Credits.
It can cover any sector, from Apps to Agriculture, from Data Capture to Device Connections, from improving drones to making doughnuts. That’s right, even the food & drink industry has massive potential to make use of R&D tax credits.
In short, to claim R&D tax relief you must:
Improve or adapt existing products/services
Be a UK based company
Aim to solve an ongoing problem
And that’s it! So even if you’re researching the best way to make a new meat-free burger, you could be eligible.
Underestimating your tax relief
This is usually where things get tricky. Without an expert in R&D to help, businesses tend to err on the side of less rather than more.
It’s understandable of course. You’d rather get some tax relief rather than face a fine from HMRC for over-claiming. But it’s still valuable tax relief that you could invest in your company.
Some of the costs that can be claimed include:
Software licence costs
Clinical trial subject payments
And this is just the tip of the iceberg. As the amount that you can claim on each one is determined by its usage in your research and development. If your R&D is taking place in your development studio or a lab for example, then it becomes easier to identify how much R&D you can claim.
However, if your R&D and your day-to-day business activities are at the same location, then have to determine how much of your utility bills were used on R&D and how much were simply your operating costs. More than that, you need to justify the costs that you claim.
As we said, it gets tricky.
Incorrect or incomplete documentation
If you don’t fully understand the guidelines and limitations of R&D Tax Claims, then gathering your documentation will be problematic at best.
Without an ongoing system that catalogues costs and processes as you accumulate them throughout the year, you’re going to have a problem when it comes to claiming your tax relief.
Whether you do it yourself, or assign an employee to the task, manually trawling through records is not only a thankless task, but it’s also a waste of your manpower. You’ll potentially delay any ongoing projects that are underway and you have a large chance of misfiling your R&D tax claim. Once you’ve made a mistake, you’ll not only delay the payment process, but you’ll also have to spend even more time solving the issue.
All in all, not ideal!
So those are the main issues that businesses face every year when it comes to tax credits. But what will businesses face from April 2023?
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R&D changes from April 2023
HMRC has recently published draft legislation to amend the rules around R&D Tax Credit claims. Now, while we currently experience what seems to be an endless string of new Prime Ministers and Chancellors, this draft legislation is set to stay.
So businesses should brush up on the new rules ready to prepare for the accounting period starting April 2023. It’s especially important as these changes can affect R&D Tax Claims up to two years before the claim!
1. Data sets, cloud computing & pure mathematics
Incredible news for businesses within the technology sector, as an additional set of costs will now be able to considered.
Data and Cloud Computing expenditures can now qualify for R&D tax relief!
With the UK Tech sector booming, this change has been a long time coming.
It’s not only applicable to the Tech sector, as businesses in other industries can often make heavy use of cloud computing and hosting services.
It’s also worth mentioning (although the vast majority of businesses will find this unnecessary) that the previous exclusion of projects seeking advances in pure mathematics is being lifted so that they too can benefit from R&D tax relief.
2. UK based R&D changes
UK R&D tax credits will now be refocused on innovation within the UK.
Currently, claims are a little loose for businesses that carry out R&D work internationally, however, the R&D changes from April 2023 further restrict R&D claims “undertaken in the UK” and “qualifying overseas expenditure”.
So what does this mean?
Essentially, most SMEs won’t have a major change here, as long as your R&D efforts are being carried out within the country. However, any EPWs (externally provided workers) must be on a UK payroll and any subcontracted R&D must be undertaken within the UK.
But the “qualifying overseas expenditure” is interesting.
HMRC support has stated that companies who wish to claim R&D tax relief overseas must do so out of necessity, not convenience. For overseas R&D to qualify for tax relief, UK businesses must conduct it abroad for either geographical, social or environmental conditions, or due to legal or regulatory requirements.
So if you’re developing a new type of deep sea sonar, you’re free to claim R&D tax relief if it’s being tested in the Mariana trench, rather than in an aquarium in Bognor Regis.
3. Stricter R&D guidelines
This R&D change coming into play from April 2023 is probably the biggest game changer for small businesses and startups. HMRC has set out new guidelines that govern R&D tax claims and they’re as follows:
R&D tax claims must be made digitally.
Qualifying expenditure must be categorised, disclosed, and brief details of the activities included.
A senior company officer must endorse the claims.
Details of advisory agents who aided the claim must be provided.
And most importantly:
5. Businesses must inform HMRC of their intention to file a claim within 6 months of the end of the accounting period to which the R&D claim relates.
With a very short time before the R&D changes of April 2023 come into play, businesses must know the rules. Whether it’s due to laxity, an overburdened workload or simply not knowing the rules, businesses that elect to apply for R&D tax relief by themselves could find themselves cut off.
This unexpected loss of valuable relief will severely hamper financial forecasting and potentially damage businesses. While it does greatly aid against fraudulent and mismanaged claims, it’s almost an absolute certainty that some businesses will fall afoul of this last point.
Our take on the R&D changes of April 2023
R&D tax credits were already tricky, and while this legislation comes as a boon to many businesses, it could trip up many startups and SMEs that are attempting to do it themselves.
Without professional planning, expert knowledge and a nuance for numbers, claiming R&D tax relief could go awry. Even before the changes, the Dynamo Group faced a similar situation:
We know accountancy and we know startups. That’s why we’re the #1 financial partner for startups! From beginning to end we understand not only the financial needs of your business but how to approach it effectively.
Our R&D tax credit experts have so far successfully claimed over £30 million for hundreds of UK startups. With our experienced team of professionals and a track record that speaks for itself, you’re in safe hands.