So far in 2023, we have seen a number of changes to the R&D tax credit relief programme. We thought it might be useful to summarise and share the 2023 R&D Tax Credit Rules.
The environment for claiming R&D tax credits has drastically changed as HMRC now believes 50% of all SME claims are made in error. That means as many as 40,000 SME R&D tax credit claims per year are in error. HMRC’s reaction to this was to hire over 300 inspectors to carry out compliance checks on R&D claims.
Before you file your R&D submission, you need to consider if you qualify in accordance with the R&D tax credit criteria and HMRC assessing practices.
Many companies have been lulled into a false sense of security, thinking that because they received an R&D tax credit refund in a previous year, their R&D work claimed qualified. The reality is that HMRC likely never reviewed the R&D claim at all. Companies are now shocked to find out their R&D claim has been denied upon an HMRC compliance check. The repercussion is that HMRC issues a notice for the R&D refund to be repaid. Sometimes with penalties assessed on top.
So let’s take a look at the new 2023 R&D Tax Credit Rules that have taken place:
New Information required to submit R&D Tax Credit Claims
As of 1st August 2023, additional information is required to be provided through the government portal when filing an R&D Tax Credit claim. The core part of the information is the preparation of an R&D project description. As HMRC will be examining this information it is critical that companies provide the correct information.
A common mistake is where companies focus on the innovative features of a product or process rather than the how and why they undertook the R&D project. Many companies simply do not adequately identify the technological uncertainty, which is the key R&D tax credit criteria.
The additional information has to be submitted before a company submits their Corporation Tax Return. In other words, this step is in addition to the filing requirements of the CT600.
In addition, if your company hasn’t filed an R&D claim in 3 years or is claiming for the first time, then you must fill out a notification on the government portal within 6 months of your tax year end.
Qualifying Costs to include Data & Cloud Computing
Since April 2023, data costs are eligible which includes data storage costs. Any companies that are claiming for software development will now be able to claim data licensing fees, including storage.
However, if a claimant has any right to publish, share, or otherwise communicate the raw data within the data set to a third party, the costs will not qualify. Also, any of these costs, that are not related or incurred as part of the R&D work, will not qualify. Read more about the information that you would need to be entered in the government portal – Additional Information Required
Foreign EPW and Contract Fees
Originally, HMRC proposed to eliminate foreign contracts and EPW in April this year but now has been put back until 1 April 2024.
Many companies who outsource their R&D work on a contract basis to countries outside the UK, will be affected by this change. Exceptions do apply in very limited cases where R&D work that cannot be carried out in the UK territory. Say testing to be done in the ocean or R&D work that needs to be carried out in a foreign jurisdiction due to regulatory requirements, such as clinical research testing in the pharma industry.
SME R&D Tax Credit Rate Reduced and then Increased
As of April 2023, the SME tax credit rate was slashed. With the uplift decreasing from 130% to 86% and the payable credit rate for loss-making companies reducing from 14.5% to 10%. The SME rate is now lower than RDEC.
The RDEC tax credit rate however has increased from 13% to 20%.
However, the recent budget has proposed that the SME scheme be amalgamated with the RDEC scheme, with the result that the SME scheme will be converted to a refundable tax credit of 20% of eligible R&D expenditure. Therefore, the uplift method will no longer apply.
Read more about what this means for SMEs – SME R&D Tax Credit Rate SLASHED
Are you worried about the 2023 R&D Tax Credit Rules?
Are you thinking of filing an R&D Tax Credit claim and have concerns about HMRC’s assessing policies and compliance checks? Or is your company undergoing an HMRC R&D compliance check? Then contact our team at RDP today to discuss further on 0208 214 1341 or email Jenni at [email protected].