Changes to R&D for companies claiming under the SME scheme or the RDEC scheme

The Government recently announced important changes to the R&D scheme for companies claiming under either the Small and Medium Enterprise (SME) scheme and/or the RDEC scheme.  These changes impact on the amount of tax relief/repayments due in respect of expenditure incurred on or after 1 April 2023.

The criteria for the SME scheme remain a company (or group) that employs less than 500 employees and has either an annual turnover under €100 million or a balance sheet under €86 million.

Key Points

• Companies claiming a SME repayable tax credit will face a significant drop in the level of those repayments.
• Profitable SME claimants, i.e., those claiming a reduction in corporation tax rather than claiming a repayable tax credit, will also see a reduction albeit not as significant.
• RDEC claimants (both profitable and loss making) will see a net increase in funding.
• Whilst these changes appear to only support large businesses, it will also benefit those SME claimants who undertake subcontracted R&D projects and/or receive grant funding. 

*Assumes the company will be subject to the 25% Corporation tax rate post 1 April 2023.
Note that the repayable credit available under both the SME and RDEC schemes is capped.

For an SME the amount of payable R&D tax credit that it can receive is capped at £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NIC) liability for the period.
Many R&D costs can be claimed when they are incurred but certain costs, i.e. employee bonuses, will be apportioned on the accruals basis.

Other Changes to be aware of:

• R&D expenditure categories will be extended to include the costs of datasets and cloud computing. This is particularly relevant for those in the Technology, Media, and Telecom sectors where these costs can be significant
• R&D in pure mathematics will now qualify for relief and can form part of the qualifying R&D activities of the claimant.
• Relief Restricted to UK activities.  For accounting periods beginning on or after 1 April 2023, R&D activity will have to be physically located in the UK for the costs to be included in R&D tax relief claims. UK companies who currently claim R&D costs paid to overseas group companies or third parties may no longer be able to include these costs in their claims. The costs of externally provided workers (EPWs) will be limited to work undertaken in the UK.
• HMRC are tackling fraudulent claims – HMRC have introduced new measures to counter abuse of the system.  

These include:

• Claims will be required to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online). 
• Claims will require a breakdown of costs across category and the inclusion of a summary of the R&D activities performed
• In addition, claims will require the endorsement of a named senior officer of the company and will also need to include details of any advisory agent used as part of the submission so their credibility can be checked. 
• Companies will need to inform HMRC of their intention to file a claim within six months from the end of the period to which the claim relates unless a company has claimed in one of the preceding three accounting periods.  The effect of this is that new claimants will now only have a six-month window to identify a claim instead of the current two-year window.
• HMRC have recently hired an additional 100 inspectors to deliver a more robust and consistent reviews of R&D submitted claims. The result has been a noticeable increase in the number of R&D-related enquiries.

In our opinion it is now more essential than ever to take professional advice before making a claim under the R&D scheme. At Moore we already prepare and file detailed R&D reports online for our clients and the tightened legislation is welcomed to root out those making unsubstantiated claims.  The main impact is going to be reduced timescale for identifying an initial claim.  Should you believe that your company is undertaking qualifying R&D it is even more important to seek specialist advice as soon as possible.