SMEs to benefit from change to the research and development tax credits schemes

Chancellor Jeremy Hunt announced a partial reversal to the SME Research & Development (R&D) tax credit cuts in the recent Spring Budget after facing months of pressure.

Start-ups had warned that the cuts, first announced last November in the Autumn Statement, would hinder growth for early-stage and research-intensive tech companies.

The R&D tax credits and relief scheme was already attracting criticism because of suspected fraud and general abuse of the initiative.

The autumn reforms to the R&D scheme became effective from April 2023 with key points including the R&D costs which can be claimed are reduced from 230 per cent to 186 per cent of qualifying expenditure and the available cash credit rate, which is for R&D tax losses that are offset against a cash rebate, is reduced to 10 per cent from 14.5 per cent.

For larger businesses, or where the claim is more beneficial, the Research and Development Expenditure Credit (RDEC) rate was actually increased from 13 per cent to 20 per cent.

Top up

The previously announced reduction will remain in place, but loss-making “R&D-intensive” start-ups will receive a top-up. Those that spend 40 per cent or more of their total outgoings on R&D will be able to claim a tax credit of 27 per cent, or £27 for every £100 spent.

The exclusion of most overseas expenditure in R&D tax relief claims is deferred for a year until 1 April 2024, to allow the Government to consider the interaction of this with a potential merged R&D relief scheme.

Two new categories of qualifying R&D expenditure will be created, for data licences and cloud computing services.

It has also been announced that all R&D claims from 1 August 2023 will need to be filed using the new digital forms, regardless of the accounting period concerned.

How to claim R&D relief

You can claim the above reliefs up to two years after the accounting period it relates to. The claim must be made in the company tax return or an amendment to the return.

For accounting periods commencing after 1 April 2023, you must inform HMRC within six months of the period end that you intend to make a claim for R&D if you are claiming for the first time or your last claim was made more than three years before the last date of the claim notification period.