Changes to R&D Scheme – how will this impact your business
In the 2022 Autumn Statement, Chancellor Jeremy Hunt announced changes to the Research and Development (R&D) Tax Relief for British businesses.
These changes, which came into effect in April 2023, affect both SMEs (small and medium-sized companies) and large businesses. R&D Tax Relief changes reflect the Treasury's strategy for UK innovation investment. The R&D SME scheme will receive a lower tax relief rate, while the R&D Expenditure Credit (RDEC) will receive a higher rate. In the 2023 Spring Budget these changes were confirmed alongside a new category for R&D intensive businesses. In comparison with the new rates, this will offer an enhanced rate for loss-making R&D SMEs whose expenditure on R&D exceeds 40% of their annual expenditure. The changes will support the most innovative companies and also show the government's commitment to fighting abuse and improving regulation compliance.
How will the R&D relief rates change?
For SMEs: The additional deduction will decrease from 130% to 86% for expenditures made on or after1 April 2023, and the SME credit rate will drop from 14.5% to 10%. The SME credit rate will remain at 14.5% for R&D intensive businesses.
The Research and Development Expenditure Credit (RDEC) rate: RDEC will rise from 13% to 20% for expenditures beginning on 1 April 2023.
The impact on R&D benefit of these changes:
| R&D Expenditure | £100,000 pre April 2023 | £100,000 post April 2023 |
| Profit making SME (>£250,000 profit) | £24,700 | £21,500 |
| Loss making SME | £33,350 | £18,600 |
| Loss making R&D intensive SME | £33,350 | £26,970 |
| Large Company | £10,530 | £15,000 |
Why are the rates for R&D relief changing?
The UK government is reforming R&D Tax Relief "to ensure public money is spent effectively and best supports innovation". Accordingly, the reforms aim to reduce waste and increase R&D, boosting private investment and economic growth.
SME R&D scheme changes have come about as a result of tax relief fraud. HMRC's 2021–2022 Annual Report and Accounts estimate that the SME scheme had 7.3% error and fraud compared to 1.1% for the RDEC scheme, totaling £469 million (£430 million from the SME R&D scheme and £39 million from RDEC).*
The Treasury believes the RDEC scheme fosters groundbreaking innovation, builds vital assets in UK companies, and improves taxpayer value. To improve RDEC's international competitiveness, relief rates have been raised.
Does the SME R&D plan remain worthwhile?
Without a doubt! The UK government remains committed to assisting SMEs that conduct extensive research, and the available tax relief can be of great assistance. Despite the less generous relief, it is essential to consider the 2023 changes in their entirety. For example, beginning in April 2023, corporations with profits exceeding £250,000 will be subject to a 25% Corporation Tax, which will only reduce R&D Tax Credits by £3.20 per £100 spent. Even for SMEs that are losing money or are less profitable, the financial boost provided by R&D Tax Credits can make a significant difference. Some innovative architects may also fall into the R&D intensive company category, allowing them to benefit from a higher tax rate under the revised SME scheme. R&D Tax Relief: What else changed in April 2023?
Last year's Autumn Budget made other significant R&D Tax Credit changes. Most measures prevent R&D claim fraud and errors. New rules include:
- Claims must be submitted digitally: Companies must submit R&D claims online. HMRC can better assess risk and review R&D expenses by requiring digital submission.
- Claims must be supported with additional evidence: Claims must be supported by R&D expenditure breakdowns to aid HMRC risk assessments.
- Claims must be backed up by a named company officer: To prevent unauthorised claims from being made in the business's name, greater emphasis is being placed on who is submitting the claims. As a result, a named officer of the company must support all claims.
- Claims must contain information about any related agents: Any agents involved in the submission must be identified in each R&D claim. This will help HMRC identify the involvement of any agents who have a history of facilitating fraudulent claims.
- If a company is a first-time claimant or hasn't filed a claim in the previous three accounting periods, they must submit a pre-notification of their claim
- Expanded qualifying expenditure categories: In a move to modernise the scheme, cloud computing and data costs can be included alongside the costs of pure mathematics projects.
From April 2024, qualifying expenses are being changed to exclude some costs for overseas subcontracting and Externally Provided Workers (EPWs) not paid through a UK payroll.
How can I be certain that my R&D Tax Credits claim is compliant?
Because claims must now be approved by a named senior officer, HMRC's renewed emphasis on enhancing compliance inevitably results in more "red tape" for businesses to navigate and increased personal responsibility for company directors.
It is now more essential than ever that businesses claiming or looking to claim R&D Tax Relief do so with an established, reputable provider to ensure maximum compliance during this period of change and prevent HMRC enquiries on your R&D claim.
Will the changes have an impact on my upcoming R&D Tax Relief claim?
The upcoming changes in the rate of benefit will only apply to expenditures beginning 1 April 2023. Because the R&D Tax Scheme works retrospectively, most current R&D claims for your last accounting period will continue to benefit from the government's more generous relief rates for expenditures up to 31 March 2023. The other changes in advance notification and inclusion of data and cloud computing costs only apply to accounting periods starting on or after 1 April 2023. It’s important to ensure that your business doesn’t miss out on the tax relief that you are entitled to.
Which architectural projects qualify for R&D Tax Relief?
Examples of situations where you could quality are as follows:
- You may have gone through several design iterations and testing to achieve the design intent of a façade or interior structure.
- If the design objective required novel modelling software or simulation methods.
- If the development site's restrictions caused environmental uncertainties like noise or façade thermal performance. This suggests technical challenges.
- If technical work required developing a new product or process because an aesthetic finish was difficult.
- If the design requires unusual or cross-industry techniques. The materials may have been available but combined in an unusual way.
- If it required a new material or method to replicate a traditional or historic component, this work may be eligible. The structural and mechanical properties of a historic building may be unknown, so it may take R&D to add new systems to existing building methods.
- Collaboration with external specialists on new design features.
Beavis Morgan can assist you in rethinking both your strategic and practical approach to claiming R&D relief and provide the high-quality support you need to give you certainty over your future claims and funding.
For assistance or guidance please contact the RIBA Business team on business@riba.org
* HM Treasury: R&D Tax Reliefs Review Consultation on a single scheme Disclaimer: This article has been written in general terms and we recommend that you seek professional advice before acting or refraining from action on any of the content herein. Information accurate at time of publishing, April 2023.
