As clients (who read our recent blogs or emails) will be aware HMRC are introducing a major revamp of the R&D rules for all claims submitted after 1 August 2023. This covers returns for all accounting periods beginning on or after 1 April 2023.
As an additional trap, you can now no longer make retrospective R&D claims. Unless you tell HMRC within 6 months of your period end that you intend to make an R&D claim you will not be able to go back and claimed for expenditure incurred by your business in previous years, even where this would have been fully allowable under the rules.
As a brief reminder:
From 1 April 2023, R&D Relief for SMEs is being cut significantly. Enhanced Expenditure is now decreasing from 130% to 86% and the rate at which we can surrender losses for tax credits is being cut from 14.5% to 10%.
In practice, this means that a company spending £100,000 on R&D tax relief under the old rules would either save £24,700 of Corporation Tax or be able to trade their enhanced expenditure in for £18,850 of a tax credit issued to them in cash.
Under the new rules, a company spending the same amount will now only be able to trade their enhanced expenditure in for a tax credit of £8,600. Depending on the rate of Corporation Tax they will pay under the new rules they can save between £16,340 to £21,500 of Corporation Tax by utilizing the losses.
Small Mercy for R&D Intensive Companies
Following the Chancellor’s announcement, If a company spends at least 40% of their total expenditure on R&D work in a year they can trade their enhanced expenditure for a tax credit at the old rate of 14.5% – therefore potentially receiving a tax credit of £12,470 instead of £8,600. Still a huge cut and not very attractive to small businesses.
With this in mind, it’s important that clients making use of R&D tax relief are aware of what is now expected of them. The detail you are obligated to include depends upon the number of projects you’re claiming for.
Additional Financial Information Required
Detailed Breakdown of Expenditure Categories and Summary of Qualifying Indirect Activities
Companies must now show a detail accounting breakdown of their expenditure in each of the below categories which contributes to the R&D claim:
- cloud computing costs, including storage, for accounting periods beginning on or after 1 April 2023
- consumable items, for example materials or utilities
- contributions to independent R&D costs
- data licence costs, for accounting periods beginning on or after 1 April 2023
- externally provided workers
- payments to participants of a clinical trial
- staff costs
- subcontractor costs
They must also include the amount of qualifying indirect activities. These are amounts of expenditure which support research but do not directly contribute to resolving the uncertainty that justifies an R&D claim in the first place. For example:
- creating information services for R&D support such as preparing a report of R&D findings
- direct supporting activities such as maintenance, security, administration and clerical activities and finance and personnel activities, for the share that relates to R&D
- ancillary activities needed to begin R&D, for example taking on and paying staff, leasing laboratories and maintaining R&D equipment, including computers used for R&D purposes
- training required to directly support the R&D project
- research by students and researchers carried out at universities
- research including data collection to make new scientific or technological testing, surveys or sampling methods, where this research is not R&D in its own right
- feasibility studies to inform the strategic direction of a specific R&D activity
This cannot include any costs related to data licensing or cloud computing.
Accounting by Project
The number of different projects you conduct determines how much information you must provide:
- for 1 to 3 projects, you need to describe all the projects you’re claiming for that cover 100% of the qualifying expenditure
- for 4 to 10 projects, you need to describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described
- for 11 to 100 (or more) projects, you need to describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described — if the qualifying expenditure is split across multiple smaller projects, describe the 10 largest
Additional Descriptive Information Required
- You must now provide a description of the field of science or technology that the project relates to.
- You must describe the baseline level of science or technology that the company planned to advance.
- Advise of the advance that the company aimed to achieve.
- Describe the scientific or technological uncertainties that the company faced.
- Describe how the project attempted to overcome these.
There are strict definitions for how each of these questions must be answered, with very specific definitions used for each of the phrases.
HMRC have been complaining to parliament for the last decade about “Dodgy R&D Claim Companies”, arguing that an industry has cropped up around this relief which approaches companies not making R&D and files bogus R&D claims on their behalf. These R&D firms then take a % of the refund received, without advising the client that if the claim is challenged it is the client’s business who will be hit with penalties and will be obligated to refund all of the overpaid tax.
Rather than seek to enforce this policy with investigations and actually checking these bogus claims, HMRC have decided that the solution to this problem is to make the R&D system extremely difficult to interact with, in the hopes that this will deter bogus claimants. Needless to say, we here at Proactive do not expect this to be a successful approach.