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UK Research & Development (R&D) Regime Changes 2023: What to Expect

27 February 2023

by Gareth Costello, Tax Senior Manager

With the UK government’s new Research and Development (R&D) tax credit regime changes coming into effect from 1 April 2023, businesses will see a significant overhaul of the tax relief available for R&D. The changes are aimed at driving innovation and increasing productivity. As well as cementing the UK’s status as a world leader in R&D.

What do these changes mean for different types of businesses and the R&D sector in general? Let’s take a look.

R&D relief percentages (for expenditure incurred after 1 April 2023)

Changes for SMEs

One of the biggest changes to the R&D regime will affect both loss-making and profit-making small and medium-sized enterprises (SMEs) that use the SME scheme. For all claims, the SME enhanced deduction will decrease from 130% to 86%. Additionally, for a loss-making SME, the R&D credit will also decrease from 14.5% to 10%. However, if the R&D expenditure consists of 40% of the total expenditure, the rate will remain at 14.5%, for what HMRC are referring to as “R&D Intensive SMEs”.

These changes will be taking place whilst the main corporation tax rate will increase from 19% to 25%. In terms of the overall impact, the ‘effective benefit’ for profit-making SMEs will decrease from up to 24.7% to up to 21.5% and from 33.35% to 18.6% for loss-making SMEs.

The table below compares the impact of the R&D rate changes, and corporation tax rates. It shows the impact on the net effective benefit to companies:

Pre 1 April (19% CT)Post 1 April (25% CT)
SME – Profitable130% enhanced deduction effective benefit = 24.7%86% enhanced deduction effective benefit = 21.5%
SME – Loss making130% enhanced/14.5% credit effective benefit = 33.35%86% enhanced/10% credit effective benefit = 18.6%

86% enhanced/14.5% credit effective benefit = 26.97% (R&D Intensive SMEs)
RDECRDEC rate 13% – effective benefit (after tax) = 10.53%RDEC rate 20% – effective benefit (after tax) = 15%

Changes for RDEC (Research & Development Expenditure Credit) Companies

The RDEC credit rate will increase from 13% to 20%. The ‘effective benefit’ after tax for RDEC companies will increase from 10.53% to 15%.

The government will explore and consult on the design of a single simplified RDEC-like scheme. The aim of this will be to provide further support for businesses investing in R&D.

Changes affecting accounting periods beginning after 1 April 2023

Territorial conditions

New territorial conditions will be introduced that will affect subcontracted R&D expenditure and payments for externally provided workers (EPWs). Subcontracted R&D activity will need to be performed within the UK. Additionally, EPWs will need to be subject to UK PAYE (pay as you earn). However, expenditure in respect of overseas activity will qualify in limited circumstances. For example, where the necessary conditions for the R&D are not present in the UK and it would be wholly unreasonable to replicate them.

It is important to note that expenditure on overseas R&D activities can still potentially qualify for relief. However, neither the cost of the R&D nor the availability of qualified personnel will be considered a relevant factor in determining whether the exception applies.

Relief for qualifying expenditure on data licences and cloud computing

The scope of qualifying R&D expenditure will be extended to include the cost of data licences and cloud computing. Not only that, but also the cost of pure mathematical advances, subject to certain limitations.

New Pre-Notification Requirement

Companies seeking to make an R&D claim for the first time will be subject to a new online pre-notification requirement. This will also be the case for companies that haven’t made a claim in their previous three accounting periods. This means that they must inform HMRC of their intention to make an R&D claim. The R&D adviser they will be using, must also be included. Lastly, this should all be within six months following the end of the relevant accounting period.

New reporting requirements

For all R&D claims, further additional information will be required to be provided to HMRC in support of R&D claims.

The reporting requirement, covered in the draft guidance here, includes the need to provide a breakdown of qualifying costs and project details. The required number of which is dependent on the total number of qualifying R&D projects in the accounting period. The claim will need to be endorsed by a named senior officer of the claimant company.

To ensure that you can make the most of these changes and maximise your claim, it’s important to seek guidance from experienced tax advisers. At DTE, we have a team of R&D tax credit specialists who can help you navigate the new regime and ensure that your claim is fully optimised. Contact us to learn more about how we can help your business stay competitive and drive innovation through the new R&D tax credit regime.

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