The Chancellor, Jeremy Hunt, presented his 2023 Spring Budget to Parliament on 15 March with a pledge to restore economic stability, support public services, and lay the foundation for long-term growth. Among these changes, R&D tax relief was a large focus with significant measures announced to support innovation and technological development.
Some of the contentious R&D measures included in the Spring Budget 2022 and Autumn Statement 2022 have been slightly curtailed, if only temporarily, which will give innovative SMEs some reprieve. R&D tax relief reform has been ongoing for several years and is becoming an iterative process with new changes announced in what seems like every Finance Bill. This is unhelpful for businesses who are not only facing challenging economic headwinds but are also wanting to keep up with the changes while continuing to invest in innovation.
In this post, we’ll outline what the new measures mean for businesses claiming R&D tax relief and how they may benefit your organisation.
Overseas expenditure restrictions delayed until April 2024
Draft legislation published last year sought to prevent companies from claiming R&D tax relief on project activity undertaken by overseas contractors; this was due to come into effect for accounting periods beginning on or after 1 April 2023. The measure will now come into effect from April 2024 to give the Government time to consider how the measure will affect the design of a unified R&D tax relief scheme.
Additional relief for loss making R&D intensive SMEs
Following consultation with industry, the Chancellor has announced a higher rate of relief for loss-making R&D intensive SMEs whose qualifying R&D expenditure exceeds 40% of total business expenditure. Those that qualify will be able to claim an elevated payable credit rate of 14.5% for surrendering losses arising from qualifying R&D expenditure from 1st April 2023. The Government estimates that around 8,000 companies could benefit from the additional relief, about 10% of current claimants.
Loss-making businesses whose qualifying R&D expenditure falls under the “R&D intensive” definition will be able to claim the baseline payable credit rate of 10%. The Government has said it remains committed to supporting R&D and recognises the important role that R&D and innovation play for the economy and society.
Consultation into a unified R&D tax relief scheme
The Government is investigating the design of a simplified, single R&D tax relief mechanism that will merge the SME and R&D Expenditure Credit (RDEC) schemes. Its consultation on simplifying the scheme closed on 13th March 2023 and the Government has yet to make a decision, although we expect draft legislation to be published in the summer.
Once the Government has decided whether to merge schemes and created a single scheme design, a final rate will be decided and announced at a future fiscal event. It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024.
Read more about the proposed single R&D tax credit scheme.
Tackling abuse and compliance
From 1 August 2023, R&D tax relief claimants must submit their claims digitally and fill out an Additional Information Form (AIF) containing a revised list of required information. The AIF form breaks down costs in a different way (e.g. separate figure for qualifying indirect activities – QIA) and demands a more detailed description of R&D activity.
First time claimants or those that have not claimed in any of the three previous calendar years will need to inform HMRC in advance that they plan to submit a claim (Claim Notification Form). Each R&D tax relief claim will require the endorsement of a senior officer of the company and details of tax agents involved should also be included.
If you have any questions about the measures announced in the Spring Budget, R&D tax relief in general, or how to make a claim, contact our tax professionals on 0161 904 0044 or email@example.com.