The Spring Budget was delivered just weeks ahead of significant R&D tax regime reforms already scheduled to take effect from 1 April 2023. The Chancellor made clear his intention to make the UK a science and technology superpower, but given the looming reforms, we were not expecting the announcement of any fundamental changes to the R&D tax regime.
We were, however, anticipating some amendments to the reforms planned for 1 April 2023 (for example, measures to better help SMEs) and in this respect, the Spring Budget was broadly in line with our expectations.
Changes afoot from April 2023
It was previously announced that changes to the rates of support under both the SME and R&D Expenditure Credit ('RDEC') schemes will apply for expenditures incurred from 1 April 2023. Major revisions to the legislation governing both schemes will also impact claimant companies for accounting periods beginning on or after this date. These relate to the eligibility of certain expenditures and activities, mandatory information requirements and the claim process, among other changes. In addition, the latest Government consultation concerning the potential merger of both schemes into a single RDEC-like scheme has just closed (13 March 2023).
What R&D announcements did the Chancellor deliver?
Of key interest to SMEs was the question of whether any steps would be taken to mitigate the impact of the reduced rates of support for expenditure incurred from 1 April 2023. Some respite was delivered with increased rates announced for certain ‘high-intensity’ SMEs. SMEs that qualify will receive a payable cash credit at a rate of 14.5%, instead of the 10% credit rate for non-R&D intensive companies, while the additional deduction rate will remain at 86% (previously 130%); meaning that these loss-making companies will receive £27 for every £100 spent on qualifying R&D.
However, the detail suggests the higher payable credit rate will only be available to loss-making SMEs with an R&D intensity ratio of 40% and above. This will be calculated as the ratio of the company’s qualifying R&D expenditure for the claim period (for both the SME and RDEC schemes) over its total expenditure for the same period. Further, to prevent manipulation of the R&D intensity ratio, companies will need to aggregate the expenditure of connected companies (as defined in s1122 CTA2010). While we would expect early-stage startups and deep research companies to meet these criteria, as they scale and overheads naturally increase, many will likely lose the higher rate of support.
What do you need to know about the R&D tax regime
The R&D tax regime reform agenda
The House of Lords has recently been critical of aspects of the Government’s Government’s approach to reform and it is welcomed that the Chancellor has acted on some of their suggestions. In particular, the previously announced reforms to restrict overseas R&D expenditure have been delayed by a further year and will now come into effect from 1 April 2024 instead of 1 April 2023.
However, the controversial claim notification requirement has been retained meaning that first-time claimants or companies who have not made a claim during the three-year period ending the day before the first day of the claim notification period will need to inform HMRC if they plan to make a claim, and will need to do so digitally and within six months of the end of the accounting period to which the claim relates.
Furthermore, it has been confirmed that the commencement date for the Additional Information Form ('AIF') requirement has been brought forward to all claims made on or after 1 August 2023, whereas previously it was expected to apply for accounting periods beginning on or after 1 April 2023. The AIF will require claimants to provide additional information to HMRC in a prescriptive format and outside of the usual Corporation Tax return, with the policy objective of making it easier and more efficient for HMRC to review claims as part of the wider initiative to combat fraud and error. The AIF will be mandatory, and claims submitted without an AIF will be invalid. It is therefore essential that companies evaluate where they may be submitting claims on or after 1 August 2023 and what work they need to undertake between now and then to ensure meeting the information requirements set out in the legislation.
The future of a single merged scheme
Finally, it was announced that considering the Government’s consultation on merging the RDEC and SME schemes, which closed on 13 March 2023, the Government intends to keep open the option of implementing a merged scheme from April 2024 and intends to publish draft legislation on a merged scheme for technical consultation, along with a summary of responses to the consultation in the summer. Though they have confirmed that any decision to proceed with a merged scheme would be announced at a future fiscal event.
We now look forward to the publication of the Finance Bill on 23 March 2023 to finally confirm the legislation behind the reforms to apply to accounting periods beginning on or after 1 April 2023 (separate legislation dealing with the changes to the rates of support has already been implemented and the new SME rate for R&D intensive SMEs will be legislated in a future Finance Bill). The legislation to be contained in the Finance Bill will likely be given retrospective effect, given it’s not expected the Bill will receive Royal Assent before 1 April 2023.
With the confirmed additional compliance requirements and upcoming changes to the legislation, it’s important that businesses are preparing for these changes and are checking and challenging their current claims methodology. Further, where claims are expected to be submitted on or after 1 August 2023, businesses will need to consider how the accelerated introduction of the AIF may impact their current claims process.
Research and development tax incentives
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