Changes to R&D Tax Credits from April 2023
Reduction in Benefits
From April 2023 the additional deduction for development expenditure will decrease from 130% to 86% and the payable tax credit rate will decrease from 14.5% to 10% (unless you are an
R&D Intensive SME).
What this effectively means is that loss making start-ups will see a decrease in cash repayment of 44% for the same amount of R&D expenditure. Profit making businesses, i.e. those that do not receive a cash rebate but instead receive a reduction in corporation tax, will see an overall decrease in 19% of the benefit received from R&D.
These changes relate to the ‘SME R&D scheme’ which the majority of our clients will fall under.
For those that claim ‘large company’ R&D relief (known as the RDEC scheme, often the case if you receive Innovate UK grants), the rate will rise from 13% to 20% and therefore you will see an increased benefit from the scheme.
Cloud and Data costs
For Accounting Periods starting on or after April 2023 all cloud and data costs incurred whilst carrying our R&D activities will qualify. This will include:
- The provision of, or access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities.
- Data licences to access and use a collection of digital data.
Focussing on the UK - delayed to April 2024
Less favourably, subcontracted work and "externally provided workers" (known as EPW and are effectively agency staff of those operating via a personal service company) will only be eligible if the work is carried out in the UK (with some very limited exceptions). This means that contractors working abroad will no longer count towards your eligible expenditure.
Changes to Externally Provided Workers (EPWs)
Another potential downside to the legislation is that payments to EPWs will only be eligible to the extent that they were paid through PAYE and deducted Class 1 NICs. This may have an impact for those EPWs who are engaged via personal service companies as they will likely be minimising their PAYE bill for tax efficiency purposes. We are waiting for more clarification from HMRC how this will work in practice and will keep you updated.
Changes to tackle fraudulent and erroneous claims
There are a number of changes here, including a requirement to make all claims online, which does not affect us as all of our work is done digitally.
HMRC also want a formal note of the name of the agent/advisor who prepared the claim, which is provided as part of the Additional Information Form.
Additional Reporting
There will be a requirement to inform HMRC within 6 months of the accounting period end date if you want to make a claim; however, this is only for companies that have not already made a claim in the last 3 years.
We will of course be handling this additional reporting requirement for all of our clients.