HMRC has introduced revisions to the regulations governing R&D claims.

On 8 August 2023 changes came into effect with newly implemented reporting obligations mandating companies to communicate their intent to make a claim to HMRC within 6 months after the end of the pertinent R&D accounting period.

Pre-notification of R&D claims

Companies that wish to claim R&D tax for the first time and in an accounting period ending after 1 April 2023 must inform HMRC by using the online portal within 6 months of the end of the accounting period.

For example
If a company has a year-end of 31 December 2023, you must inform HMRC by the 30 June 2024.
If a company has claimed R&D within the last 3 years then there is no need to notify HMRC. However, companies who have not claimed for 3 years must notify HMRC using the new rules.
HMRC have made it very clear that if an R&D claim is submitted for a period that requires advanced notification, the R&D claim will be removed from the tax return from HMRC on the basis that it has been included as an error.  
This notification can be made by:

• an agent of the company IE your R&D provider or;
• a representative of the company

As part of the notification, you will need to disclose the following information:

• a list of any agent, along with their contact details and who has assisted with the preparation of the R&D claim
• the UTR of the claiming company
• the accounting period for which you wish to claim R&D
• a summary of the R&D activities along with a summary of how this meets the R&D requirements. Evidence of this will not need to be provided.

SME Scheme Rate Changes

Along with the changes from 8 August 2023, HMRC have recently made adjustments to the rates at which companies get relief for R&D expenditure from 1 April 2023. To summarize, these adjustments are:

For profitable companies:
Any revenue R&D expenditure was previously entitled to an additional 130% uplift. This has now been reduced to 86%. Previously, when coupled with the Corporation Tax rate of 19%, this yielded a net benefit of 25% to the company.
However, in light of the updated Corporation Tax rate of 25% and the diminished R&D rate of 86%, these result in a maximum benefit of 22% to the company. This could be reduced to a minimum of 17% if you continue paying Corporation Tax at the old rate.

For loss-making companies
Previously, companies were able to surrender losses generated by R&D claims for cash at a rate of 14.5% per £1 of loss. This has now been reduced to 10% and coupled with the diminished uplift of 86% from 130%, in addition to the actual incurred expenditure, this results in a net benefit of 19% down from 33% previously.

For loss-making R&D intensive companies
Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% of total company expenditure. These companies now have a tax credit available at 27%

RDEC Scheme for large companies
The RDEC scheme provides profit-making and loss-making companies with a R&D credit but the credit amount is subject to Corporation Tax.

• The RDEC rate has increased from 13% to 20% resulting in an increased net benefit to the company of 16%*.

*Based on main rate Corporation Tax paying companies.

R&D activity changes

Data licenses & cloud computing
Expenditure relating to data licenses and cloud computing can now be claimed. Costs must be directly relevant to the qualifying R&D activity.

Pure mathematics
Pure maths was specifically excluded from qualifying activity until April 2023. Mathematical techniques used within science are now qualifying for R&D. Advances in maths can be treated as science for the purposes of R&D tax relief.

Overseas R&D

The R&D treatment for overseas expenditure will also be changed for accounting periods starting after 1 April 2024.

Changes to overseas R&D

• Subcontracted costs must relate to UK activity, overseas costs will not be allowed.
• Externally Provided Workers must be subject to UK PAYE if based overseas.
• Directly employed staff can be based overseas.

Takeaway

R&D enhanced credit tax relief scheme continues to be one of the most generous schemes to companies engaging in genuine research and development activities.

For any questions or more information, please do not hesitate to reach out to our team.