UK’s R&D Tax Relief Modification; Draft Legislation

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Written by: Liez Comendador
UK’s R&D Tax Relief Modification; Draft Legislation

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Intending to ensure that the programme is modernised, affordable, and in better compliance, the government announced proposed legislation in July 2022 addressing significant modification to the UK’s Research and Development (R&D) tax incentives to take effect on 1 April 2023.

On 20 December 2022, HMRC released a draught guidance document outlining the specifics of how these reforms will operate in practice, as well as summarising the substantial additional data that claimants will now be expected to provide to make a claim.

This is the last chance for claimants to give HMRC feedback on the amendments, as the final legislation is anticipated in the Spring Finance Bill 2023. This article examined the potential implications of these amendments as well as the steps claimants need to take to ensure that their ensuing claims comply with the new regulations.

The proposed legislation’s exemptions on the limits to relief for R&D activities carried out abroad were, however, limited, which worries businesses competing with other countries for top specialists or programmes that lead global R&D out of the UK.

UK’s R&D Tax Relief Modification; Draft Legislation

The excellent news for cutting-edge tech companies is that “qualified expenditure on software and consumables” has been expanded to include spending on data licences and cloud services.

By enabling businesses to claim an increased corporation tax subtraction or payable credit on their R&D costs, R&D tax credits encourage company investment. This change moves companies closer to a single, streamlined RDEC-like programme for everyone while ensuring that government funding is as efficient as feasible and more competitive.

Without significantly altering the overall financial envelope for supporting R&D, the government will consult on the design of a single scheme and engage with businesses to determine whether further support for R&D-intensive SMEs is required before the Budget. This adjustment increases R&D by streamlining the R&D tax relief structure and bringing the generosity of the two programmes closer.

The net impact is shown in the table below:

Profitable Company

SME Regime 
Up to 31 March 2023
From 1 April 2023
130% uplift on costs = 24.7% net benefit
86% uplift on costs = 21.5% net benefit
Last Company Regime (RDEC)
Up to 31 March 2023
From 1 April 2023
Headline rate 13% = 10.5% post tax
Headline rate 20% = 15% post tax

Company: Not Making a Profit

SME Regime
Up to 31 March 2023
From 1 April 2023
Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy
Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy
Last Company Regime (RDEC)
Up to 31 March 2023
From 1 April 2023
10.5% subsidy
15% subsidy

The tech companies losing money will be affected the most because R&D tax credits can be a vital finance source. Since the present rates are more closely matched, the government may now take the next step toward consolidating the SME and RDEC regimes into a single R&D tax relief rate (like other R&D regimes abroad).

The reliefs are expected to encourage £60 billion in R&D by businesses in 2027–28, a 60% increase from 2020–21, according to the Office for Budget Responsibility (OBR), which has verified that this change has a net neutral impact on R&D spending. The OBR anticipates that the reform will lessen fraud and error while saving £1.3 billion annually by 2027–2028.

References

HM Revenue & Customs. 2022. ‘Reforms to R&D Tax Reliefs’, GOV.UK (GOV.UK): https://www.gov.uk/government/publications/research-and-development-rd-tax-reliefs-reform/reforms-to-rd-tax-reliefs

‘Reforms to UK’s R&D Tax Reliefs – Draft Guidance Published’. 2023. KPMG (KPMG): https://kpmg.com/uk/en/home/insights/2023/01/tmd-reforms-to-uk-r-and-d-tax-reliefs-draft-guidance-published.html

‘R&D Tax Relief Is Changing – Here’s What You Need to Know’. 2022. Bdo.co.uk : https://www.bdo.co.uk/en-gb/plugdin/insights/r-d-tax-relief-is-changing-heres-what-you-need-to-know

Walton, Anna. 2022. ‘R&D Tax Reforms – Draft Legislation Changes Examined’, ForrestBrown: https://forrestbrown.co.uk/news/r-and-d-tax-credit-reforms/

Author

  • Ghazaleh Bashkani

    Ghazaleh is an avid learner, believing that the principle of adapting to the changes in this advancing world allows her to meet the emerging business needs of her clients as an accountant. Ambitious and vibrant, she visualizes herself becoming one of the sterling professionals in her field and managing one of the branches of Legend Financial.

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