4 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.
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
So even if you’re researching or developing something that is new-to-market or new-to-business 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.
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 like Google Cloud or AWS.
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. Stricter R&D guidelines
First time applicants need to notify HMRC within 6 months of end of accounting period (previously you could backdate your claim by 2 years).
In addition, an online notification form must be completed for everyone, you must outline the overview of the R&D project, it’s costs. - i.e this is similar to the actual process.
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.
Just to repeat, you must now mention your adviser/agent and senior company officer on the form - this is to prevent self-serving claims.
If you costs spread across more than one project, HMRC are looking to you to describe those projects. For example, if you have 3 projects then you must consider included all 3.
Note - past claims may have only considered one project even though costs were on others (that might not be considered innovative).
3. R&D Tax Credit Rates
SME Credit Rates are Falling
The headline rate for small businesses is being cut. After 1 April 2023 the deduction will move from being 130% to 86% and the SME credit from 14.5% to 10%.
In effect this means the max amount of credit that is available to loss making businesses will be 18.6%, from 33%.
Note, this is a double whammy for small businesses as the PAYE cap that restricts development costs being incurred overseas will not change, combined with increases in corporation tax coming into effect (see below).
What does this mean for your startup? It means:
For every £1 you spend on R&D you will receive 18.6p back.
You will now receive up to 55% less in R&D credit rebate depending on how (un)profitable your business is.
Let’s illustrate this with some examples:
If you are a loss making SME - with £100k qualifying expenditure you will receive £18,600 instead of £33,000 which is a 55% reduction.
If you are an SME at break even point - £100k qualifying expenditure will give you £8,600 instead of £18,850, a 55% reduction.
If you are a profitable SME with taxable profit of £250K - the company will receive a tax saving of £21,500 vs £24,700 (a 13% reduction) on £100k qualifying expenditure.
If you are a startup that normally applies for R&D Tax Credits then reach out to us, and we can talk through the changes made to the R&D credit schemes.
RDEC scheme is Getting an Increase
The RDEC scheme goes from 13% to 20% which has given large companies a surprise but this seems to be paid for by SMEs. This means that the overall tax benefit from the RDEC scheme will increase from 10.54% to 16.2%.
Before the increase in Corporation Tax, RDEC claims will be worth 10.53p for every £1 spent on R&D. When changes come into effect from April 2023, RDEC claims for accounting periods beginning on or after 1 April 2023 will be worth 9.75p for every £1 spent on R&D.
4. Overseas Expenditure
An overseas expense restriction will be in place. This means generally overseas workers are no longer qualifying costs. Subcontracted costs must be in the UK, except in exceptional circumstances (eg. clinical trials).
HMRC 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.
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 could be faced with a surprise.
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.