It was announced by the Chancellor, Jeremy Hunt, in last year's Autumn Statement that there would be significant changes to the Research & Development (R&D) tax relief system. These measures are set to be introduced in conjunction with the draft legislation proposed for the Finance Bill 2022-23 back in August 2022, which is designed to tackle system abuses specifically.
Despite a 13% to 20% rate increase for the separate R&D expenditure credit (RDEC), SMEs have been hit hard by the Autumn Statement announcements. In what was regarded as a ‘rebalancing’ of the two R&D relief brackets, a cut to the deduction rate for the SME scheme to 86% and the credit rate to 10% are set to come into force from 1 April 2023.
As a result, the RDEC and SME schemes will now have broadly the same tax value of around 16% of qualifying cost. However, most businesses claiming are SMEs so the reduction for this part of the scheme ultimately represents a tax relief saving for the Government rather than an investment incentive.
We explore the detail of both the upcoming reforms and system changes below.
What’s involved in the reform?
Administration and disclosure – To combat increased abuses of the system, new compliance rules are to be introduced, including additional reporting disclosures for claims. These enhanced disclosures will require a cost breakdown across the qualifying categories and a brief description of the subsequent R&D activity. New claimants will also need to notify HMRC within six months of the end of the financial year in which the R&D work was carried out.
Qualifying costs – Businesses involved in software projects (cloud computing and data storage) would be able to claim for relief.
Additional measures – Claims would need to be endorsed by a businesses’ named senior officer and the details of any advising agent needs to be included.
The underlying reason for the above implementations is to tackle and prevent the abuse that’s been plaguing the R&D system. While we very much welcome action to tackle the misuse, it is argued that the changes won’t address the major contributor – rogue advisors mis-selling the scheme.
The additional checks by HMRC could also run the risk of further slowing down the claiming process, leading to cashflow disruption.
Overview of the new measures announced by Government
As noted above, there’s set to be a significant ‘rebalancing’ of the tax relief. The impact of these changes will be a reduction of more than 30% in the tax benefit to companies undertaking R&D projects from April 2023.
When combined with the corporation tax rise from 19% to 25% in the same month, SMEs will be faced with challenging decisions in respect to reinvestment.
We will assist our clients in preparing a technical and financial analysis of their claim, in accordance with HMRC’s new disclosure requirements. We always undertake a best advice tax planning exercise on the impact of your claim. Once filed we will see the claim through to its HMRC processing and unlike most others in the R&D consultancy world we ensure your refund is sent directly to you by HMRC. In the unlikely event that HMRC want to review the claim, we can handle the Enquiry process on your behalf, every step of the way to its conclusion.