The research and development tax credit initiative has been going through a number of reforms lately, which can be challenging to keep up with. This page keeps track of all the R&D tax credit announcements, what changes have already been applied and those reforms that are scheduled to come into effect.
Changes Applied From Accounting periods beginning on or after 1st April 2024
Changes Applied From 8th August 2023
Changes Effective for R&D spend from 1st April 2023
Changes Applied From Accounting Periods Beginning On Or After 1st April 2023
Changes Applied From Accounting Periods Beginning on or after 1st April 2024
Changes Applied From 8th August 2023
Changes Applied from Accounting Periods Beginning on or after 1st April 2023 until 1st April 2024 (When the Above New Merged Scheme Will Apply)
New Rates
Changes Applied To Accounting Periods Beginning On Or After 1st April 2023
Below is the historical announcements of the R&D tax credit reforms. However, we cannot guarantee the Government won’t change their strategy for the initiative in a new, future announcement.
The below overseas restriction rules apply to accounting periods beginning on or after 1st April 2024.
Overseas Restrictions on Contractor Payments
Contacted R&D project activities (undertaken from the above period) must now be undertaken in the UK to qualify for any aspect of the R&D tax credit scheme, this means:
Overseas Restrictions on Externally Provided Workers (EPWs)
Externally provided workers (EPW) only qualify if the company or the staff controller is required to apply Pay As You Earn (PAYE) and account for National Insurance Contributions (NICs), either in full or in part, for a worker. If so, this will act as a gateway and all that workers earnings will now qualify (minus the proportion when they were not engaged in a customer’s R&D activity).
Exceptions to Overseas Restrictions
Other than the exception for companies registered in Northern Ireland claiming Enhanced R&D Intensive Support (ERIS), all the following three circumstances must apply before expenditure on overseas contractors or EPWs can be considered as eligible for R&D tax relief.
Contracted R&D:
In the new merged scheme, the company making the decision to undertake R&D can claim for contracted R&D. For example, if a software company contracted to deliver a solution decides to engage in R&D for that solution, they are eligible to claim.
Subsidised Expenditure:
Similar to the existing RDEC scheme, the merged scheme will not reduce support if a company receives grants covering a portion of its R&D expenses.
Loss-making Companies:
The notional tax rate for loss-making entities in the merged scheme will be lowered from 25% (as in the current RDEC scheme) to 19%.
Tax Relief Delivery:
Tax relief will be administered through a taxable above-the-line expenditure credit, which will be implemented at the current RDEC rate of 20%.
Payment Process:
Third parties cannot be nominated as payees for R&D tax credit payments, which means, in most cases, R&D reliefs will only be paid directly to the claimant company.
Enhanced R&D Intensive Support
In the Spring 2023 Budget, new support was announced for R&D intensive loss-making SMEs, who spent 30% (changed from 40% in the Autumn Statement 2023) or more of total outgoings on R&D, in the form of an enhanced support rate of tax relief of £27 for every £100 of qualifying R&D spend. We’re still awaiting full details, draft legislations and possible application dates for this. However, in the Autumn Statement 2023 it was also announced that provisions would be made to allow an intensive SME that successfully claims intensive relief in one year to claim it in the following year.
Refocus on UK Innovation
The Spring 2022 Budget announcement of a refocus on UK-based innovation with a restriction of some overseas expenditure will now come into effect from 1st April 2024, instead of 1st April 2023.
1. Enhanced R&D Intensive Support
New support announced for R&D intensive loss-making SMEs (those who spend 40% or more of total outgoings on R&D) in the form of an enhanced rate of tax relief of £27 for every £100 of qualifying R&D spend. (Awaiting draft legislation).
2. Reduced Loss-Making SME Rate
Other loss-making SMEs conversion rate will be reduced from 14.5% to 10%.
3. Reduced SME Scheme Rate
SME’s scheme additional tax deduction rate will be reduced from 130% to 86%.
4. Increased Large Company Rate
RDEC scheme’s additional tax credit rate will increase from 13% to 20%.
1. Data & Cloud Computing Costs
Qualifying costs will include dataset licence payments, staffing data costs and cloud computing service costs used specifically for a R&D project.
2. Pre-Notification of Claim
New claimants and those who have not claimed within the last 3 years are required to inform the HMRC, within 6 months of their year-end, that they intend to submit an R&D tax credit claim.
3. Refocus on UK Innovation – Postponed
The Spring 2022 budget announcement of a refocus on UK-based innovation with a restriction of some overseas expenditure will now come into effect from 1st April 2024, instead of 1st April 2023.
The below additional information will be required for all claims made on or after 8th August 2023.
Update 25th August 2023 – The Additional Information Form is now in use, read more about the Additional Information form and how we’ve changed our service to simplify this new step for our accountant partners and our clients.
1. Claim Endorsement
Claims will have to be endorsed by a named senior officer within the claimant company.
2. Agent Details
Full details to be provided of the agent who advised the company on compiling the claim.
3. Cost Breakdown
A detailed cost breakdown per innovation project will be required across for the following categories:
On the 17th of November, the Government delivered an Autumn Budget that had wide-ranging implications for many businesses. We explain the three key R&D tax credit changes that were announced and how they will affect innovative businesses R&D expenditure on or after 1st April 2023.
1. RDEC Rate Increase
The Research and Development Expenditure Credit (RDEC), which applies to large companies and SMEs, under certain circumstances (e.g. if they have particular grants or are subcontractors), will see a 50% rise in the relief they could receive, from 13% to 20%
2. SME Rate Decrease
Unfortunately, SMEs which have less than 500 employees and a turnover less than €100m or a balance sheet that totals less than €86m, will see a nearly 34% decrease in their relief as it drops from 130% to 86%.
3. SME Loss Surrendering Decrease
SMEs surrendering a loss will also see a decrease in the relief they can receive from 14.5% to 10%.
Earlier in 2022 the Government announced three, more positive reforms that would benefit UK based innovation and the R&D tax credit initiative, which will come into effect in April 2023.
1. Data & Cloud Computing Costs
Qualifying R&D project costs will include dataset licence payments, staffing data costs and cloud computing service costs.
2. Refocus on Innovation Based in the UK and Not Overseas
Third-party subcontractors and Externally provided workers (EPW) must carry out work in the UK and be on a UK payroll.
3. Tackling Abuse and Improving Compliance
The government is introducing a new cross-cutting team to tackle abuse and requiring more detailed claims to be submitted digitally.
Manufacturing R&D Tax Credit Examples