Changes to R&D Tax Relief
The rules surrounding R&D tax relief claims are becoming more rigorous, writes Chartered Tax Adviser Nick Giles from Nottingham-based accountancy firm Page Kirk. But that shouldn't deter genuine applicants.
For many years, companies have been incentivised to carry out Research and Development (R&D) activities in the UK through some generous tax breaks.
Prior to 1 April 2023, large companies were able to gain a tax credit (known as an RDEC) against their corporation tax liability, which essentially saved them 9.7% of their qualifying expenditure in tax. SMEs were able to claim an enhanced 230% deduction of their qualifying expenditure.
From the outset of the scheme, the definition of what constitutes R&D activities was clear. To qualify, there has to be an area in science or technology where there is uncertainty – from an expert's point of view – as to whether something is technologically possible or over how something could be done. A company's R&D activities are then aimed at overcoming that uncertainty and creating an advance in the field of science or technology.
In recent years there has been an increasing issue with the quality of R&D claims submitted to HMRC, with some advisors and niche R&D firms making claims on behalf of companies that stretch the definition of qualifying R&D activities beyond credulity. An R&D claim is made as part of a company's corporation tax return and can be added to a previously submitted return if it is within the permitted timeframe of two years following the end of a company's accounting period. Retrospective, questionable claims have therefore proliferated and due to the systems in place, along with a lack of resources at HMRC, many spurious tax refunds have been paid out unquestioned.
In order to help tackle the perceived abuse of the scheme, a number of changes have been made from 1 April 2023 that companies will need to be aware of.
Firstly, the value of the scheme to large companies has increased, with the RDEC now worth 15% of qualifying expenditure. but for SMEs the value has fallen, with companies now getting an enhanced 186% deduction.
Secondly, and more importantly, the mechanism for making R&D claims has changed.
For accounting periods beginning on, or after, 1 April 2023, a first-time claimant or a company that has not made a valid R&D claim in the previous three years will now need to make a notification to HMRC that it intends to make an R&D claim within six months of the end of its accounting period. This measure will prevent a lot of the retrospective claims that have been made in the past.
In addition to this, R&D claims will no longer be made entirely as part of the corporation tax return. Instead, a company must submit an additional information form online to HMRC in support of their R&D claim before the corporation tax return is submitted. If this is not done, any R&D credit or enhancement on the corporation tax return will be rejected.
The form will require the contact details of the main senior R&D contact within the company who is responsible for the claim and the details of any agent involved. Comprehensive details of the R&D projects will be required, with an emphasis on describing how known scientific or technological capability was lacking and how the projects undertaken sought to advance the fields of science or technology. The measure seeks to introduce more personal accountability for R&D claims.
The fundamental principles behind R&D claims have not changed and these changes should not adversely impact genuine claimants. However, the imposition of new reporting requirements could mean some legitimate claimants miss the opportunity to make a claim. Companies who think they may be eligible to claim under the schemes should ensure they have a continuous channel of communication open with their accountant, who can advise them in real time as to whether any action is required so that a valuable claim is not lost.
To find out more information, you can get in touch with us today by calling 0115 955 5500 or emailing enquiries@pagekirk.co.uk.