If you have a sizeable presence in the UK, are you prepared for the significant reform to the UK R&D tax legislation coming into effect on April 1, 2023?
With UK corporation tax rate increasing from 19% to 25% from April 1, 2023, this was going to have an adverse impact to the UK R&D tax benefit. However, the UK R&D tax legislation is undergoing one of the most significant changes since its inception in 2000 and will have positive and negative implications that groups with UK presence need to consider. The latest draft guidance from HMRC reinforces the profound changes across the schemes including headline rates, qualifying cost categories, and administration burden.
For context, there are two schemes in the UK R&D tax regime; one for large companies and one for Small and Medium Enterprises (SME) i.e. those with less than 500 employees and less than €100m turnover or €86m on the balance sheet (including connected enterprises). The key changes and when they come into effect are set out below:
Changes in headline rates of relief (commence from April 1, 2023)
- Large companies: Increase in RDEC (R&D expenditure credit) rate from 13% to 20%
- Expected “net” benefit therefore increases from 10.5% to 15.0% of R&D expenditure after tax.
- SME: Reduction in the additional deduction from 130% to 86%; and the credit for loss surrender reduces from 14.5% to 10%
- Expected benefit for tax-paying companies reduces from 24.7% to 21.5%. Cash credit reduces from 33.4% to 18.6%.
Changes to qualifying cost categories (come into effect for accounting periods starting on or after April 1, 2023)
- Introduction of cloud computing and data expenditure: This should uplift a few R&D claims, especially for IT product development companies that rely on SaaS or hosting needs for development purposes.
- Restriction on non-UK labor expenditure: Going forwards, any non-UK subcontracted, or Externally Provided Worker, costs are excluded from future claims. This will likely have an adverse impact on claims if a significant portion relates to this type of expenditure. HMRC have left the door ajar, but broadly only allows non-UK labor expenditure where it is “wholly unreasonable” to replicate overseas conditions in the UK.
Changes to administration requirements (come into effect for accounting periods starting on or after April 1, 2023)
- Notification to HMRC: “First time claimants” must notify HMRC within 6 months of the relevant period end that a claim will be made, via a new electronic form, where “First time” includes those who have not claimed in the previous three periods. Some key points for claimants to consider:
- Who is responsible for notification? Compliance team may not be aware of intention to claim, which places reliance on R&D adviser either submitting the notification or getting the client to. Claimants need to ensure who has the responsibility of notifying the tax authorities to avoid missing out on R&D benefit through administrative error.
- Change in the group may affect which company claims. Notification is by company, not group. This must be spotted early, i.e., post-facto changes to group contracting arrangements could result in missing out on a year’s claim.
- Submission of R&D claims: Claim documentation must contain certain information; and it must be filed via another new electronic form. This includes details about the R&D adviser (if any), expenditure breakdowns by cost category, project descriptions, and information about qualifying external labour expenditure (i.e. contractors and similar). Claims are not valid without completing the form; and draft legislation allows HMRC to reject claims for this reason, among others. This contrasts with the current approach of no mandatory requirement to submit any documentation although most claimants choose to file reports that address queries raised by HMRC previously.
If you would like to discuss how best to navigate the upcoming UK R&D tax legislation reform, please reach out to a member of the Research Credits & Incentive Services team who will connect you with our colleagues in the UK who can help claimants create new robust processes and transform their existing processes to ensure they are well positioned going forwards.
 His Majesty’s Revenue and Customs, UK equivalent of the US IRS