Since its inception, the UK’s R&D tax credit scheme has offered a valuable incentive for businesses carrying out innovative work, and creating, or improving new products and processes.
Companies that qualify can deduct an extra 130% of costs from their taxable profit - those that are loss-making could receive a tax credit of 33p for every £1 incurred.
On 20 July, draft legislation was released heralding major changes for the R&D tax credit regime.
Here’s what you need to know:
New Eligible Expenditure
Qualifying costs were previously limited to staff, sub-contractor, software, and consumable costs. HMRC has now included additional categories including data, cloud, and pure mathematics costs.
This is good news for those engaged in the latest technology advances, particularly in AI, robotics, and machine learning.
Refocusing on UK Innovation
Relief for subcontracted work will now be limited to UK activity. Expenditure must be either ‘UK expenditure’ or ‘qualifying overseas expenditure’ (i.e. there’s a justifiable reason for undertaking R&D outside the UK e.g. legal or geographical restrictions).
R&D Claim Procedure
Finally, several measures have been introduced to tackle abusive claims including specifying the format of claims.
An important new condition is that companies intending to make their first claim must notify HMRC within 6 months of the end of their accounting period – meaning companies may miss out if they are not prepared.
The latest changes will take effect from April 2023 - companies intending to make a claim should seek early advice on the potential impact these rules may have.