In what feels like (and most likely is) the third version of this article we’ve had to do, we thought it would be helpful to summarise exactly where we’ve got to with the various proposed R&D changes, as we head towards 1 April 2023.
Further clarifications have come in, older updates are out, and as we find ourselves in a legislative hokey cokey, it’s worth stating that these still aren’t set in stone, and there could be further amendments announced before the end of March.
So, as we stand, what do we know?
CHANGES COMING INTO FORCE FROM 1 APRIL 2023 (AS AN ABSOLUTE DATE)
- SME rate (profit-makers) reduces from 130% to 86% (net benefit drops from 24.7% to 21.5% due to the increase in the Corporation Tax rate from 19% to 25%).
- SME tax credit rate (loss-makers) reduces from 14.5% to 10% (net benefit drops from 33.35% to 18.6%).
- Large company/R&D Expenditure Credit rate increases from 13% to 20% (net benefit increases from 10.53% to 15%) – also claimable by SMEs with grant funded projects and those performing work for large companies.
CHANGES COMING INTO FORCE FOR ACCOUNTING PERIODS BEGINNING ON OR AFTER 1 APRIL 2023
- Disallowance of overseas costs such as non-UK agency workers or subcontractors, except for certain reasons (please see our previous article here: FURTHER CHANGES TO THE R&D REGIME – Cooper Parry).
- New measures to combat abuse including advance notification (within 6 months of the end of the accounting period, for new claimants), naming your R&D adviser, company accountability and providing greater detail regarding R&D projects (we will provide a more in-depth analysis of this nearer the time).
- Inclusion of data and cloud computing costs.
- Practically, this means the first AP these apply to is APE 31 March 2024, and for a December year end, not until APE 31 December 2024 (good for disallowance of overseas costs, not so good for data and cloud costs being included).
WHAT ELSE ARE WE WAITING FOR THAT COULD CHANGE THE ABOVE?
- The findings from the recent House of Lords Finance Sub-Committee inquiry are due out at some point in January or February, which may have further suggestions around measures to come in from 1 April 2023 regarding addressing abuse and the conduct of R&D advisers.
- On 20 December 2022, HMRC issued draft guidance on the new changes being introduced and, of particular note, issued a list of what will need to be included in the “Additional Information Form” that will go live in April 2023. See Section 5: Research and Development (R&D) tax reliefs – draft guidance – GOV.UK (www.gov.uk). We, and others, are sending some “points of clarification” back to HMRC, that may see some further tweaks to this guidance. Once we have these answers, we will do a further article about these new requirements.
- Last week, the Government announced the 2-month consultation period (from 13 Jan to 13 March 2023) regarding the introduction of a single scheme for R&D relief (R&D Tax Relief Reform Consultation Launched – GOV.UK (www.gov.uk). If implemented, the single scheme will come into force on 1 April 2024, but there may well be amendments to the rules coming in on 1 April 2023 as a result (perhaps around rate changes).
WHAT COULD COMPANIES BE THINKING ABOUT NOW?
- The recent clarifications provide companies with greater visibility and opportunity to forecast how the changes will affect them, with potential opportunities for forward planning to mitigate their effects.
- If companies have R&D projects that they are thinking of starting soon, then the rate changes coming in could inform when to do them (given HMRC are wanting an actual split of when R&D costs were incurred, rather than a time-apportioned claim). This depends on the size of the company. With the SME rates reducing, companies should consider starting projects as soon as possible, whereas if large companies could hold off commencing projects until after 1 April 2023, the R&D benefit is 42% higher.
- If companies have a good amount of data and cloud costs, then amending their APE to 31 March 2024 could bring these costs into their claim 9 months earlier (if they were a December year end, for instance). Conversely, if a company has a lot of costs based overseas (often occurs in IT based claims), pushing the APE later in the year would delay the point at which these costs start to be disallowed within claims.
- Further down the line, new claimants will need to have the advance notification deadline in mind, so that they don’t miss it. The first one will be APE 31 March 2024 and a notification deadline of 30 September 2024. APE 31 December 2024 will have to notify before 30 June 2025.
If you would like to discuss how the changes will impact your claim, and discuss any advance planning opportunities, please feel free to contact us.
