Navigating the Reforms: Changes in Research and Development Tax Relief

Research and Development (R&D) Tax Relief is a government initiative to foster innovation among small and medium-sized enterprises (SMEs). Despite numerous reforms, a recent report by the All-Party Parliamentary Group (APPG) indicates that the scheme still needs to support SMEs adequately.

The report highlights the scheme's complexity and bureaucracy, which can create challenges for smaller businesses. Moreover, the scheme is primarily dominated by larger companies, leaving SMEs needing help to access its benefits. The APPG suggests several amendments, including simplifying the application process, enhancing transparency, and making the scheme more accessible to SMEs. Additionally, the report recommends promoting the scheme more extensively to SMEs to raise awareness and uptake.

At Hoxton Mix, we recognise the crucial role of innovation in driving business growth. The R&D Tax Relief scheme can be a valuable resource for SMEs seeking to invest in research and development. Nevertheless, the scheme must be both accessible and straightforward for smaller businesses. We encourage the government to seriously consider the APPG's recommendations and work towards simplifying the application process, increasing transparency, and enhancing accessibility for SMEs. We also urge SMEs to capitalise on the scheme's benefits by seeking professional advice and guidance.

To learn more about recent changes to the Research and Development (R&D) Tax Relief scheme, the UK government has published a comprehensive guide detailing the key reforms. This guide encompasses the latest updates, such as modifications to the SME scheme, the introduction of a cap on the payable tax credit, and measures to combat system abuse.

If you're pressed for time and unable to read the full report, we have prepared a concise summary of the key points for your convenience. The summary should take approximately 2 minutes to read, offering a comprehensive overview of the main changes and their impacts.

The UK government is implementing changes to Research & Development (R&D) tax relief, affecting companies that claim under the Research and Development Expenditure Credit (RDEC) and small or medium enterprises (SME) R&D relief schemes, as well as some with a Patent Box election. These changes, applicable from 1 April 2023, aim to ensure that the reliefs are up-to-date, competitive, and well-targeted.

Key measures include:

1. Extending qualifying expenditures to include datasets and cloud computing costs to incentivise R&D using modern computational approaches.
2. Tackling abuse and improving compliance by requiring digital claims submission, mandatory additional information forms, endorsement by a senior officer, advance claim notifications, and agent details disclosure.
3. Addressing anomalies and unforeseen consequences, such as allowing companies to claim RDEC where they previously erroneously claimed SME relief, clarifying expenditure qualifications, and amending time limits for claims.
4. Supporting businesses transitioning from the SME scheme to RDEC by extending SME status for one year after exceeding size thresholds.
5. Amending Patent Box rules in response to expanded R&D qualifying expenditure categories.

These changes result from the government's review of R&D tax relief schemes and consultations with stakeholders to better incentivise private-sector R&D investment in the UK.

You can access the guide in full via the following link:

https://www.gov.uk/government/publications/reform-of-research-and-development-tax-reliefs/research-and-development-tax-relief-reform-changes.

In conclusion, the R&D Tax Relief scheme holds significant potential to support SMEs in propelling innovation and growth. However, it is evident that further improvements are necessary to ensure the scheme effectively serves SMEs. At Hoxton Mix, we remain dedicated to assisting small businesses in their pursuit of innovation and growth.

FAQ

What are R&D tax credits?

R&D tax credits are government incentives designed to encourage innovation by providing financial support to companies investing in research and development projects. These credits can significantly reduce a company's tax liability or, in some cases, result in a cash payment.

Is my business eligible for R&D tax credits?

Businesses in any industry undertaking qualifying R&D projects can apply for R&D tax credits. Qualifying projects must involve resolving scientific or technological uncertainties by developing new or improving existing products, processes, or services.

How much can my business claim in R&D tax credits?

The amount your business can claim depends on multiple factors, including your company size, the type of R&D tax credit scheme you use (SME or RDEC), and the extent of your R&D expenditure. SMEs can claim up to 33% of eligible R&D costs, while larger companies can claim up to 13% through the RDEC scheme.

What costs qualify for R&D tax credits?

Eligible R&D costs include staff salaries, employer's NIC and pension contributions, subcontractor costs, consumables, software, and some utility costs directly associated with R&D activities.

How do I apply for R&D tax credits?

To apply for R&D tax credits, you must submit a detailed technical narrative and financial calculations within your Corporation Tax Return (CT600). This application should explain to you your R&D projects, the scientific or technological uncertainties they address, and the eligible R&D costs incurred.

Can I claim R&D tax credits for past projects?

You can claim R&D tax credits for qualifying projects completed within the last two accounting periods.

How long does the R&D tax credit process take?

The process can take anywhere from a few weeks to several months, depending on the complexity of your claim and how quickly HMRC processes it. Typically, HMRC aims to process 95% of R&D tax credit claims within 28 days.