The recent Autumn Statement continued the Government’s clampdown on what it sees as abuse of the R&D Tax Credit system by some SMEs. The Government has taken the blanket approach of cutting the enhanced R&D tax deduction and the tax credit rates for the SME scheme. Paul Arnold, a Partner and R&D Tax specialist here at Bevan Buckland LLP, details the changes that are to be introduced and explains the likely impact on businesses.
For expenditures incurred on or after 1 April 2023, the enhanced R&D tax deduction rate will be cut from 130% to 86% and the tax credit rate will be reduced from 14.5% to 10%.
The impact on loss-making SMEs will be the greatest and will nearly halve the claimable cash benefit from 33.35% to 18.6% – this relates to the fact that loss-making companies claiming under the SME scheme are able to claim a cash receipt from HMRC, with this cash often helping to fund future R&D activities. The impact for profitable companies will be much less, with the current benefit of 24.7% reducing to 21.5% (when factoring in the increase in the corporate tax rate to 25% from 1 April 2023).
These changes are on top of the PAYE/NIC cap introduced in 2021.
The Government is also seeking to deter invalid claims and is introducing new rules for all R&D claims to be submitted digitally and with more information being required (with these requirements being mandatory). The new rules also require that:
- claims will need to be endorsed by a named senior officer of the company;
- companies planning to make a claim will need to notify HMRC before the claim is submitted and within six months of the end of the accounting period (unless it has made an R&D claim in the previous three years) – a failure to notify will prevent a company from filing an R&D claim for that accounting period; and
- companies will have to provide details of any agent advising them on the claim.
These requirements are clearly aimed at increasing individual responsibility, and potentially liability, for spurious claims. In addition, when R&D activities are contracted out or the company uses Externally Provided Workers (for example, agency workers) there is going to be a requirement for these activities to be undertaken in the UK (in virtually all circumstances) in order to be claimable.
The regime has been blighted by unscrupulous advisors, and while we welcome any steps taken to reduce this, it is clear that these changes may have a significant impact on genuine R&D activities. The risk is that genuine claimants will be put off by these changes and the increased time that may have to be spent in answering HMRC’s queries.
To avoid falling foul of the rules, and to minimise the risk of HMRC investigation, it is more important than ever that companies seek the advice of reputable specialist tax advisors.
However, it is not all bad news as the Autumn Statement increased the available relief under the large company scheme from 13% to 20%. This will benefit many SMEs – for instance, those claiming under the large company scheme because the R&D project is grant funded. In addition, there are also changes to be introduced that will widen the categories of qualifying spend i.e., data and cloud computer expenditure, as well as an update to the definition of R&D to include pure mathematics.
Get in touch…
As Wales’ leading independent accountancy firm, the team at Bevan Buckland LLP has the required expertise to advise and support businesses through challenging situations. Should you or your business require guidance relating to the upcoming R&D changes or any other matter, please get in touch by telephoning 01792 410100 or by sending us an email.