R&D Tax Credits 2023 Reform: The Essential Guide for Startups
The UK government has recently announced pivotal changes to the R&D Tax Credits system in the Autumn Statement 2022 and Spring Budget 2023, ushering in a new era of investment strategy for innovation. This will impact both SMEs and large organisations from April 2023 and April 2024 so we decided to delve into the rationale behind these changes, how they will affect businesses, and what lies ahead for the future of R&D Tax Credits.
A Shift of Power: Changes to R&D Relief Rates
The government's strategy shift is evident in the rebalancing of relief rates for R&D Tax Credits. SMEs claiming under the R&D SME scheme will face reduced tax relief rates, while those claiming R&D Expenditure Credit (RDEC) will enjoy more generous rates. Alongside these adjustments, the government is determined to combat abuse and enhance compliance in the R&D landscape.
Adjustments for the SME R&D Scheme
From 1st April 2023, SMEs will experience a decrease in the additional deduction from 130% to 86%, and the SME credit rate will drop from 14.5% to 10%. However, R&D intensive SMEs with qualifying expenditures constituting at least 40% of their total expenditure can still claim a higher payable credit rate of 14.5%.
Enhancements for RDEC
Starting 1st April 2023, the RDEC rate will see a substantial increase from 13% to 20%.
We summarise how this affects your startup in our Youtube video presented by Wes Rashid, our founder, which you'll find at the end of this blog so keep scrolling!
A Shift in Focus: The True Value of R&D Tax Credits
Despite the reduction in relief rates for SMEs, the R&D Tax Credits system remains a valuable support for research-intensive businesses. The government's commitment to fostering innovation is unwavering, and the tax relief changes must be considered within the broader context of the evolving UK tax landscape.
For instance, the increase in Corporation Tax to 25% for companies with over £250,000 in profits from April 2023 results in a mere £3.20 difference in R&D Tax Credits for every £100 spent. Furthermore, even loss-making SMEs can greatly benefit from the cash injection provided by R&D Tax Credits, particularly if they are R&D intensive.
The Road Ahead: R&D Tax Credits in the Future
The government's reform of the R&D Tax Credits system aims to promote efficient use of public funds and bolster innovation. By tackling wastage and incentivising private R&D investment, the Treasury seeks to foster economic growth and attract international competitiveness.
The shift towards the RDEC scheme is driven by the belief that it is more effective at spurring cutting-edge innovation and generating better value for taxpayers. Studies have shown that RDEC incentivises between £2.40 and £2.70 of additional private R&D expenditure per £1 of support, while the SME scheme generates only £0.60 to £1.28.
Navigating the Compliance Minefield: Ensuring a Robust R&D Tax Credits Claim
Several other important changes to R&D Tax Credits were announced in last year’s Autumn Budget. Most measures are designed to improve protection against fraud and errors in R&D claims. The new measures state the following:
Digital Submission of Claims
All R&D Tax Credit claims must be submitted online, which allows HMRC to efficiently review information and conduct risk assessments. By embracing digital technology, HMRC aims to minimize errors and fraud while expediting the claims process.
Enhanced Claim Transparency
To further safeguard against fraud and errors, claimants must provide additional information such as a breakdown of R&D expenditure types. Moreover, claims must be supported by a named officer of the company, ensuring accountability and preventing unauthorized submissions.
Disclosing Associated Agents
Each R&D claim must include details of any associated agents involved in the submission. This enables HMRC to identify and scrutinize agents with a history of facilitating spurious claims.
Pre-Notification for New Claimants
Businesses claiming R&D Tax Credits for the first time, or those who haven't claimed in the previous three accounting periods, must submit a pre-notification to HMRC online.
This step enables HMRC to proactively educate companies on valid R&D processes and establish additional safeguards against illegitimate claims.
If you are a first-year claimant you will have to notify HMRC 6 months after the end of the accounting period. These rules come into effect from 1 August 2023.
Further Changes and The Future of R&D
Expanded Qualifying Expenditure Categories
The scope of qualifying expenditure has been broadened to include cloud computing costs, data storage and mathematics project costs. This expansion reflects the government's commitment to fostering innovation and supporting modern business practices.
Overseas R&D Expenditure Restrictions: Implementation Delayed
Originally planned for April 2023, the introduction of restrictions on overseas subcontract and Externally Provided Workers (EPWs) not paid through UK payroll has been postponed to 1 April 2024.
Increased Government Investment in R&D
Acknowledging the critical role of R&D in stimulating private sector investment and economic growth, the UK government has pledged to raise public funding to £20 billion annually by 2024-25, marking the largest increase in R&D funding ever.
The Future of R&D Tax Credits: A Unified Scheme on the Horizon?
The Treasury has indicated that the recent R&D Tax Credit changes are a step towards a single, simplified RDEC-like scheme for all businesses, including R&D-intensive SMEs. Draft legislation for a possible merged scheme is expected to be published for technical consultation in the summer.
Ensuring R&D Tax Credit Claim Compliance: Partnering with Reputable Providers
The increased focus on compliance, coupled with the heightened accountability of company directors, demands that businesses claiming or considering R&D Tax Credits work with established, reputable providers. Doing so ensures maximum compliance and minimizes the risk of HMRC enquiries.
With over 8.5 years of experience, Accountancy Cloud has assisted more than 1,000 innovative companies in submitting robust and compliant R&D Tax Credit claims. Our team of highly qualified tax experts and technical consultants is well-equipped to help your business navigate these changes, ensuring you receive the maximum benefits you're entitled to, in full compliance with HMRC.
To learn how the upcoming changes will impact your R&D Tax Credits claim and to speak with a specialist, contact us today. For now, feel free to watch our latest collaboration with Barclays Eagle Labs which is available to watch on demand on Youtube.
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