Research & Development –The New Rules for SMEs

Research & Development –The New Rules for SMEs

With effect from 1 April 2023, the rules applying to R&D relief under the Small and Medium Sized Enterprises (SME) scheme will be changing. A summary of these changes is given below.

Rates of Relief

The enhanced deduction for expenditure incurred after 1 April 2023 will be reduced from 130% to 86%.

The cap applying to R&D credits payable to loss-making enterprises will be reduced from 14.5% to 10%. In most cases, this credit will also be limited to a maximum of £20,000 per year, plus three times the company’s total PAYE and NIC liability.

The R&D Expenditure Credit (which can be claimed by an SME if subcontracted by a large company) will be increased from 13% to 20%.

For many companies, the impact of the reduced SME rate changes will be more significant in practice, because they will coincide with an increase in the Corporation Tax rates applicable to post-April 2023 profits.

Qualifying Expenditure

As confirmed in the Spring Statement 2022, the definition of R&D for tax reliefs will be expanded following clarification that pure mathematics is a qualifying cost and that R&D expenditure relating to cloud computing, including storage, will qualify for relief from April 2023.

Claims Procedure

There will also be changes to the R&D claim process. Companies that have never claimed before, together with those that have not made a claim in any of the previous three accounting periods, will now need to comply with a new ‘pre-notification requirement’. This means the company must notify HMRC that it intends to make a claim, within six months of the end of the accounting period to which the claim relates. The company must also include details of its R&D adviser in this notification. If it is possible for the company to prepare and file a full claim within the specified six-month deadline, pre-notification will not be required.

Because the R&D system has been abused by many taxpayers, further measures will also be introduced to combat the increase in fraudulent claims. These focus on the information provided in relation to the R&D project for which the claim is being made and will require the taxpayer to give additional details regarding the workers, costs involved, and agent engaged to prepare the claim. It will also be necessary for a named senior officer of the company to approve the claim.

Territorial Conditions

The April 2023 changes will also see the introduction of new territorial conditions. The first of these is the requirement for PAYE to be operated on all payments made to external workers (workers provided by a third party). The second is that subcontracted R&D work will need to be performed in the UK if the associated expenditure is to qualify for relief.

There will be exemptions to this if expenditure is incurred in relation to overseas activities because the conditions necessary for the R&D are not present in the UK and where other legal or regulatory requirements dictate that the R&D must be undertaken outside the UK. The cost of the R&D and workforce availability will not, however, be considered relevant factors for the purpose of these exemptions.

Related publications from HMRC can be found at:

Reforms to R&D tax reliefs – GOV.UK (www.gov.uk)

Research and Development Tax Relief reform – GOV.UK (www.gov.uk)

20230113_R_D_Consultation.pdf (publishing.service.gov.uk)

Liz Etherington , Tax Consultant

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