R&D tax relief regime from April 2023 – inconsistencies for businesses

10 August 2022

Draft legislation and further guidance was published in July that covers changes to the enhanced R&D tax reliefs due to come into effect from 1 April 2023. Over the coming weeks, to help businesses to prepare, we will go deeper into the detail – beginning with the impact of the date that these changes come into effect.

As currently drafted, all changes to the R&D tax relief regime contemplated by the draft legislation will come into effect ‘for accounting periods beginning on or after 1 April 2023’. For those familiar with new legislation, this seems unusual as it creates inconsistencies between businesses that draw up their accounts to different dates (often something legislators are at pains to avoid).

Take, for example, ‘Company A’, a company with a December year end. The proposed changes will first have an impact in their accounting period beginning on 1 January 2024.

In contrast, their competitor, ‘Company B’, has a March year end. For Company B, the changes will have an immediate impact on 1 April 2023.

The difference means that Company A will be able to claim for certain overseas costs (ie those that will no longer be eligible in the future, as a result of the changes in the draft legislation) for nine months longer than Company B (from 1 April to 31 December 2023). This is as a result of the definition being ‘for periods beginning on or after’ the effective date.

Company B, however, will be at an advantage over Company A because from 1 April it is able to claim for:

  • health and social care levy; and
  • cloud computing and data costs.

Company A, on the other hand, will need to wait until 1 January 2024 to start claiming these costs.

Legislators usually seek to deal with these issues by splitting accounting periods that straddle the implementation date into two notional accounting periods – one falling before the effective date, and one after. This enables all companies to operate on an equal footing, claiming (or omitting) costs up to the implementation date, and making the change for the notional period falling after that date. We have raised this with HMRC, and currently there does not appear to be an intention to amend the draft legislation. We will wait to see whether this remains the case.

In the meantime, businesses should be considering the April 2023 changes that will positively and negatively affect them. If there is a strong impact either way, then some management teams may be tempted to reconsider their financial year-end date, with the aim of either capturing costs that will be lost in the future, or accelerating the ability to claim newly eligible costs. Any decision in this regard would be subject to consideration of the wider commercial, accounting and financial implications.

If you would like to discuss these changes further, please speak to James Tetley or to your usual contact in RSM’s specialist Innovation Reliefs group.

James Tetley
James Tetley
Partner, Innovation Reliefs
James Tetley
James Tetley
Partner, Innovation Reliefs