Changes to R&D Tax Credits from April 2023

Overview 📘

From April 2023, HMRC introduced significant reforms to the UK R&D Tax Relief system. These changes affect the level of relief available, the types of qualifying costs, and the administrative process for submitting claims.

Most notably, the SME R&D scheme has seen a reduction in benefit, while the RDEC scheme (typically used by large companies and Innovate UK grant recipients) has become more generous.

This guide summarises the key changes and how they may impact your company’s next R&D claim.

💸 Reduction in SME R&D Benefits

From 1 April 2023, the following changes apply to the SME R&D Scheme:

Impact:

• Loss-making start-ups will see an average 44% reduction in their cash repayment for the same qualifying expenditure.
• Profit-making businesses will experience an overall 19% reduction in their effective benefit.

These changes apply to most of our clients who claim under the SME R&D scheme.

📈 RDEC Scheme: Increased Benefit

For companies claiming under the Research and Development Expenditure Credit (RDEC) scheme, typically large businesses or SMEs with Innovate UK grants, the rate increased from 13% to 20%.

This means RDEC claimants will benefit from a higher post-tax cash benefit, improving the scheme’s value for larger or grant-funded companies.

☁️ Cloud and Data Costs

From accounting periods starting on or after 1 April 2023, companies can include certain cloud and data costs as eligible R&D expenditure.

Qualifying costs now include:

• The provision, access, and maintenance of remote data storage, operating systems, software platforms, and hardware facilities.
• Data licences to access and use digital datasets, provided they are used directly for qualifying R&D activities.

💡 This change recognises the growing importance of digital infrastructure in innovation and software development.

🌍 Focusing on UK-Based Activity (Delayed to April 2024)

From 1 April 2024 (delayed from the original 2023 start date), subcontracted R&D work and Externally Provided Workers (EPWs) will only qualify if the work is carried out in the UK.

What this means:

• Contractors working outside the UK will no longer count as eligible R&D expenditure (except in very limited cases).
• This change aims to encourage R&D investment within the UK.

👥 Changes to Externally Provided Workers (EPWs)

Payments to EPWs will only qualify where the individuals are paid through PAYE and subject to Class 1 National Insurance Contributions (NICs).

This change may affect workers engaged via personal service companies (PSCs) who minimise PAYE for tax efficiency.

HMRC is expected to issue further clarification on this rule. We will continue to monitor developments and update clients as guidance evolves.

🛡️ Tackling Fraudulent and Erroneous Claims

HMRC has introduced several compliance-focused measures to reduce incorrect or fraudulent R&D claims:

• All claims must now be submitted online (which aligns with our existing digital process).
• The claim must include the name of the agent or advisor who prepared it, provided via the new Additional Information Form.

💡 These changes are part of HMRC’s wider effort to improve claim transparency and accountability.

📝 Additional Reporting Requirement

Companies that have not submitted an R&D claim in the previous three years must now notify HMRC of their intention to make a claim within six months of the accounting period end.

This pre-notification process ensures HMRC is aware of first-time or infrequent claimants in advance.

Barnes & Scott will handle this additional reporting step on behalf of all affected clients.

✅ Summary