R&D Tax Credits - Summary of New Rules from 1 April 2023 Onwards

• The Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.
• The SME R&D enhancement rate will reduce from 130% to 86%.
• For profitable tax-paying SMEs, the cash tax saving will be reduced from the current 24.7p in every £1 to 21.5p in every £1 (for companies paying corporation tax at the revised rate of 25% from 1 April) and reduced to 16.3p in every £1 for those that remain at the 19% corporation tax rate.
• SME R&D payable credit rate will decrease from 14.5% to 10% (except for 'R&D intensive companies, see below) - this change results in the cash tax benefit for loss-making companies falling from the current 33p in every £1 to 18.6p in every £1.
• New category of R&D SME companies to be introduced called ‘R&D Intensive companies’
• An R&D Intensive company is defined as an SME company whose qualifying R&D expenditure makes up at least 40% of its total (tax deductible) expenditure for the period (updated to 30% for accounting periods commencing on or after 1 April 2024 per the Autumn Statement 2023).
• R&D Intensive companies will continue to benefit from the 14.5% tax credit rate (albeit at at the new lower SME enhancement rate of 86%).
• R&D Intensive companies will benefit from a cash tax benefit of 27p in every £1 (this compares with the pre 1 April 2023 benefit of 33p and the new non-R&D intensive company benefit of 18.6p).

Our view: Large companies are winners with the increase in the RDEC rate from 13% to 20% - although grant-funded SMEs will also benefit from this increased rate too.

The slashing of the SME R&D rate (as announced in Nov 2022) is bad news and ill-considered. It was effectively a knee-jerk reaction to concerns over the growing numbers of claims and HMRC’s lack of resources to cope and police the claims that were being filed. This is no reason to ‘hurt’ legitimate early-stage and growing companies; and this is why the new category of ‘R&D Intensive’ companies was created (following lobbying) in the Spring 2023 Budget.

The introduction of the R&D Intensive company category effectively introduces a third (!) R&D relief from April 2023: to add to the improved RDEC relief and the slashed SME ‘non-intensive’ R&D relief schemes. Uncertainty over whether the 40% limit (30% for accounting periods beginning after 31 March 2024) can be met will play havoc with companies' cashflow forecasting. It could also lead to a new form of ‘boundary-pushing’ aimed at nudging claims over the SME intensive % line and into the new R&D intensive category.

And then, just as companies start to get to grips with the new R&D regime, we kick off with a new unified scheme from 1 April 2024.

• Extension of the scope of qualifying expenditures to include the costs of datasets and of cloud computing e.g. a proportion of AWS costs could be included.
• Extension of the scope to also include all mathematics – clarifying in particular that ‘pure maths’ can qualify.
• Companies will need to inform HMRC, in advance, that they plan to make a claim.
• Advance notification is required, using a digital service, within six months of the end of the period of account to which the claim relates.
• Claim notification will only be required where an R&D claim has not been filed during the period of three years ending with the day before the first day of the claim notification period.

Our view: The extension of the scope of qualifying expenditure is welcomed and long overdue to reflect the realities of R&D work in the software development sector.

The advance notification system is designed to prevent abuse, such as when advisors approach companies that may not have realized they were eligible for R&D, leading to last-minute claims often filed just before the two-year deadline. However, this system isn't hitting its target. It could inadvertently exclude legitimate but poorly advised companies. Instead of adding this extra step, HMRC should focus on thoroughly vetting and regulating suspicious last-minute claims.

• All claims made on or after 8 August 2023 must be filed digitally and will have to be accompanied by a compulsory additional information form, providing HMRC with more detail of the claim to include:

1. Break down of the costs down across qualifying categories and providing a description of the R&D.
2. Each claim will need to be endorsed by a named senior officer of the company.
3. Additional information and claim notification forms will need to include details of any agent who has advised the company on compiling the claim.

Our view: The information required in the ‘Additional Information Form’ includes nothing onerous and simply follows the information format that we have provided in all claims in any case.

• Merger of the SME relief into the RDEC relief
• RDEC relief calculated at a rate of 20% resulting in an effective tax rate saving of 15% under the main corporation tax rate of 25% for profitable/tax-paying companies
• Loss making companies can calculate the notional tax (Step 2) using the Small Profits Rate (SPR) of 19% (as opposed to the main rate of 25%) to increase the tax credit available - effective rate of 16.2%
• Change in rate of R&D expenditure from 40% to 30% for determining R&D intensive SMEs plus introduction of a one-year grace period
• Subsidised expenditure rules no longer apply
• Contracted out rules clarified to attribute R&D to the decision-making company that engages with subcontractors (subject to any specific facts to the contrary).

Our view: The unified R&D scheme that draws primarily on the RDEC relief, resulting in two schemes applying going forward:

1. RDEC

2. SME R&D Intensive scheme.

Clarification around subcontractors and subsidised expenditure are welcomed although not all subcontractor cases will be clear-cut.

The enhancement to the relief for loss-making companies and the softening of the R&D expenditure rate for the SME Intensive relief are both helpful to SMEs.