R&D Tax Credit Claims - Changes from April 2023

2023 has brought with it a lot of changes to the tax world. We published an article towards the end of last year about developments to R&D tax relief claims coming into play in April 2023 and here we are again with further changes.

When a company makes an R&D claim, it is standard procedure – and strongly recommended by HMRC but not a legislative requirement – to prepare a report outlining the activity it has conducted in R&D to give evidence for the claim. The report typically includes:

• A breakdown of costs
• The details of technological and scientific advances
• The number of projects completed
• Qualifying activities
• Uncertainties for the future

HMRC provides guidance on the content it would expect a claimant to include, but historically there has been no standard structure, so the information submitted in support of a claim can vary significantly.

However, in a major change and in a bid to tackle tax avoidance and fraud, from 8th August 2023 HMRC is making it compulsory for every company that wants to submit an R&D claim to complete and submit an additional information form to HMRC. What’s more, previously the report usually accompanied the company’s corporation tax return, but the changes now dictate that businesses must submit this additional form to HMRC before their corporation tax return. This can be done via a digital portal.

If businesses fail to do this or submit the form after the tax return is submitted the R&D claim will be rejected.

Although the additional information form will provide HMRC with a large proportion of the detail that would ordinarily be included within an R&D report, there are certain aspects it doesn’t cover such as the company background and project methodology. We would therefore recommend that all R&D claimants continue to submit a report to accompany their claim as this will aid HMRC’s understanding of the company’s activities.

Who will be most affected by the changes?
In theory, the requirement to submit the additional information form shouldn’t be too onerous for accountants as long as they are already collecting the level of detail required. If advisers are preparing detailed reports as standard, most, if not all of the information required by the additional information form should be obtained from their clients during the claim process.

Many smaller enterprises who prepare their own R&D claims may not currently submit the level of information required by the additional information form, so these companies are likely to be significantly impacted by the introduction of the new requirements.

It isn’t always cost effective for very small businesses to engage with an R&D adviser, and they will often prepare and submit their own claims. Whilst they can continue to do this, we expect smaller businesses to be heavily impacted by the new requirements and the level of detail that will need to accompany their claims.

What are the current rates of R&D relief?
There were changes to rates after April 2023 and we have noticed a few further changes this time round. For costs incurred prior to 1st April 2023, smaller and medium sized enterprises could receive an uplift on their costs of 130% based on corporation tax rates and a net benefit of around 24.7% tax saving. If the business has made a loss, they can surrender the loss for a repayable tax credit of 14.5%, representing 33% net benefit.

After the April 2023 changes, the uplift dropped from 130% down to 86%, representing a decrease in the benefit from 24.7% (£130 @ 19%) to 21.5% (£86 @ 25%).However, those surrendering a loss will see the repayable tax credit reduce from 14.5% to 10%, a reduction in benefit from 33.35% to 18.6%. For R&D intensive businesses – those who spend 40% of their overall costs on R&D – the 14.5% repayable tax credit can still be claimed, but this still represents a reduction in benefit from 33.35% to 27%.

The R&D landscape has seen significant changes over the last 12 months. Over 100 new R&D specialists have been recruited within HMRC and the level of scrutiny has increased tenfold with the number of enquiries opened by the team having already doubled.

It’s vital that all R&D claimants are aware of the new obligations and the importance of submitting information to HMRC to accompany their future claims. If you would like any advice on whether you qualify for R&D tax relief or on making a claim, please get in touch today.

Stephanie Hurst