Much has been said about the reforms and changes being made to the research and development (R&D) enhanced tax relief regimes and other tax incentives for innovation; so much so that businesses could be forgiven for losing track. To help, we have set out below a summary of what is happening, and when.

R&D tax reliefs

The following changes have already been enacted and take effect for expenditure incurred on or after 1 April 2023.

• The enhanced tax deduction available to small and medium-sized enterprises (SMEs) in respect of qualifying R&D expenditure decreases from 130% to 86%, and the payable credit for loss-making SMEs is cut from 14.5% to 10%. This means that, when the increase in the main rate of corporation tax from 19% to 25% from the same date is taken into account, the SME R&D enhanced tax relief is worth 21.5p for every £1 of qualifying expenditure to profitable companies paying tax at that rate, down from 24.7p beforehand, whilst the cashflow benefit of the payable credit falls from 33.35p to 18.6p per £1 for loss-making SMEs. However, in his Spring Budget 2023, the Chancellor announced a relaxation for loss-making SMEs that are ‘R&D intensive’ companies – those that incur more than 40% of their total expenditure on R&D activities. These companies will continue to benefit from the 14.5% payable credit rate, giving a cashflow benefit of 26.97p per £1 of qualifying expenditure.
• The R&D expenditure credit (RDEC) for large companies increases from 13% to 20%. Taking account of the change in the main rate of corporation tax, this gives an increase in the net benefit of the RDEC from 10.53p to 15p per £1 of qualifying expenditure for all claimants.

The following changes are expected to be introduced for accounting periods beginning on or after 1 April 2023.

• The categories of qualifying expenditure will be extended to include certain expenditure on data sets and cloud computing. The addition of data costs will, where the conditions are met, allow relief to be obtained for the costs of licencing data sets, which are a vital tool used in R&D projects by companies in a variety of sectors. The inclusion of cloud computing costs, meanwhile, will enable enhanced relief to be obtained in respect of the costs of the provision of access to, and maintenance of, data storage, operating systems, software platforms and hardware facilities.
• There will also be changes to administrative aspects of the R&D tax reliefs, including a requirement that companies must inform HMRC in advance of their intention to make a claim within six months of the end of the accounting period to which the claim relates.

At the Spring Budget, the Chancellor announced that, for claims submitted on or after 1 August 2023, an associated additional information return must be submitted digitally. This will require, amongst other information:

• specific details in relation to the activities undertaken and expenditure incurred;
• the identity of any agent that has advised in relation to the making of the claim; and
• the identity of the individual in the company responsible for making the claim.

Furthermore, with a potential effective date of April 2024, the government is considering a move to a single R&D tax relief regime, modelled on the existing RDEC scheme, but with some adjustments. The Chancellor also announced that a restriction on enhanced relief for non-UK activity, which had been expected to apply for accounting periods beginning on or after 1 April 2023, will be delayed by 12 months to coincide with these wider reforms. When these take effect, subcontracted R&D, contributions to independent research, and the costs of externally provided workers will generally only qualify for enhanced relief to the extent that the relevant activities are carried out in the UK. There will be limited exemptions for R&D activities that cannot take place in the UK, either because the R&D requires specific geographical, environmental, or social conditions not present in UK, or because of legal or regulatory requirements that mean it cannot take place in the UK.

Patent box

With the move to a 25% main rate of corporation tax (previously 19%), the tax rate differential for profits falling within the patent box regime, which taxes eligible profits at 10%, has increased by 6% to 15% and therefore is now 67% more valuable for companies that pay corporation tax at the main rate.

Creative sector tax reliefs

The government is seeking to simplify and modernise the existing enhanced tax reliefs for film, television programme, and video game development companies, by moving to an expenditure credit mechanism. This will be introduced for periods beginning on or after 1 January 2024 to ensure the reliefs continue to function effectively once new multinational top-up tax rules take effect at broadly the same time. There are also a number of other changes being made to the operation of these reliefs, including enhanced rates of relief for animation and children’s TV tax relief, various relaxations that may increase the number or value of claims in some sectors, and certain new restrictions to focus relief to UK expenditure, which may impact specific claimants.

Plan ahead

With this level of change to the tax regimes affecting innovative companies, early planning is critical to ensuring a smooth transition, enabling those affected, where possible, to benefit to the extent the reliefs become more generous, and avoid being caught out by any changes that make them less generous or more onerous to obtain.

For more information, please get in touch with James Tetley or your usual RSM contact.