Business Innovation in 2023: The new rules for R&D
From April, the government will introduce new rules for R&D.
In recognition of the importance of innovation in driving growth in the UK, HMRC has given tax breaks to businesses that create new products and services through research and development (R&D).
Businesses have experienced a significant increase in profitability and cash flow as a result of R&D tax credits in recent years. There are critics who claim that the scheme has been abused.
The scheme was overhauled in autumn 2022, making it less generous but allowing businesses to apply under wider criteria.
With less fraud, there should be more opportunities for genuine innovative businesses, especially in emerging fields such as cloud computing.
Changes to the rules
Businesses will be subject to new rules as of 1 April 2023:
There will be a reduction in the SME additional deduction rate from 130% to 86% percent
As a result, it means:
Imagine that a company spends £100,000 on R&D.
Tax relief of £130,000 could be claimed under the current scheme. With corporation tax at 19%, that's a saving of £24,700.
By 23/24, the same company could only claim relief on £86,000, even though corporation tax would rise to between 20 and 25 percent. As a result, they could save up to £21,500.
SME surrenderable losses can be claimed at a lower rate than the SME payable credit rate
Here's what it means:
From a maximum of 33 percent cash back, loss-making companies will receive 18.6 percent instead.
In addition, the 'surrender' rate will be decreased to 10% from 14.5 percent.
In 22/23, our example company spending £100,000 could have claimed £33,000. For loss-making SMEs, the figure will fall to £18,600, and for profit-making businesses, it will fall to £16,340.
Exclusions and inclusions of expenditures have been revised
Essentially, this means:
For R&D, there are five cost categories:
Payroll
Subcontracted costs (SME only, cannot be included in RDEC – unless a qualifying body)
Expenditure on externally provided personnel such as agency workers
Raw materials used during R&D, utilities and other consumables
Software costs
A new set of criteria will apply from 1 April 2023: overseas R&D will no longer be eligible for inclusion in claims to incentivize R&D in the UK. This technology has become an important tool for many innovative companies at a significant cost. Cloud-based computing costs will be included in the calculation. Aside from pure mathematics, some costs related to quantum computing and deep technology will be covered by the scheme.
For first-time claims, claims must be made online with notice
What this means:
In order to submit a claim, companies must use the digital system and include a summary of the cost categories. An application must be signed by a senior officer of the company and include the name and contact information of any advisors involved.
HMRC must also be informed six months in advance that first-time applicants intend to make a claim.
Here is more information from HMRC's website.
Contact Zyla Accountants if you would like to discuss how this will affect your business or make a claim.