R&D in ‘23: the new rules affecting innovative businesses

The government has brought in new rules around R&D which came into effect in April 2023.

Innovation has been an important driver of growth in the UK and in recognition of this, HMRC has given tax breaks to businesses which engage in research and development (R&D) to create new products and services.

In recent years, R&D tax credits have had a significant impact on the profitability and cash flow of participating businesses. The scheme has come under fire from critics who say that the system has been abused.

In autumn 2022, the scheme was overhauled, making it less generous but widening the criteria under which businesses could apply.

It is hoped that there will be less fraud and more opportunities for genuine innovative businesses, particularly in emerging fields such as cloud computing, which had been previously overlooked.

The new rules

Since 1 April 2023, the new rules outlined below came into effect:

• The SME additional deduction rate has been reduced from 130% to 86%

What this means:

Let’s take as an example a business which spends £100,000 on R&D.

Under the previous rules, it could claim tax relief on £130,000. With corporation tax at 19 percent, that comes to a saving of £24,700.

As of April 2023, the same business would only be able to claim relief on £86,000, though corporation tax rose to 25%. This means that their maximum saving would be £21,500.

• The rate of the SME payable credit rate which can be claimed for surrenderable losses has also decreased

What this means:

Loss-making companies will see a significant decrease from a maximum of 33% cash back to 18.6%.

The surrender rate of 14.5% will be decreased to 10%.

Our example company spending £100,000 could have claimed £33,000 in 22/23. In 23/24, that figure will drop to £18,600 for loss-making SMEs and £16,340 for profit-making companies.

• The expenditure inclusions and exclusions have been revised

What this means:

There are five cost categories for R&D:

• 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

Since1 April 2023, new criteria apply: to incentivise R&D in the UK, overseas R&D will no longer be eligible for inclusion in claims. Cloud-based computing costs will be eligible for inclusion, acknowledging that this technology has become a significant tool at a significant cost to many innovative companies. Finally, some of the costs relating to pure mathematics will fall under the scheme, again acknowledging new areas of research such as quantum computing and deep tech.

• Claims must be made online, with notice for first time claims

What this means:

Claims can no longer be submitted by post: companies must use the digital system and include a summary of the cost categories that make up the claim. The application must be signed by a named senior officer of the company and include details of any advisor involved in making the claim.

First time applicants must also give six months advance notice to HMRC that they intend to make a claim.

The HMRC website gives further information here.

If you would like to talk through how this will affect your business, speak with an R&D tax credit specialist to discuss your options.