The Research and Development Tax Credit has seen some major changes following Jeremy Hunt’s Spring Budget 2023. This incentive is now shifting to be more effective on the investments for businesses in the UK from the treasury. These new changes will come into effect as of April 2023 and affect both SMEs and large organisations.
For those claiming R&D Tax Relief, they will see lower rates compared to the past. Those who claim the R&D Expenditure Credit can expect higher rates and more security in their investments.
What are the Changes in R&D from April 2023?
The changes will affect both small and medium businesses, as well as larger organisations.
- For SMEs, the most significant change is that they can now claim up to an additional 20% of their qualifying costs back in tax credits, compared to 10% payable credit in the past. This allows them to recover a much greater portion of their investments in research and development. Furthermore, they will be able to offset the credit against their corporation tax liabilities, rather than just being issued a cheque from HMRC.
- Loss-making SME organisations will also now be able to claim a payable tax credit of up to 14.5%, instead of the set rate of 10%. This means that businesses can recover more of their investments if they make a loss in their research and development activities.
- For large organisations, there is also good news with an increase in the so-called ‘above the line credit. This type of tax credit is issued as a reduction in corporation tax, rather than being paid out in cash.
- The new scheme also provides more flexibility when it comes to claiming credits in different years. SMEs can now choose to carry back up to five years' worth of losses, with no limit on the amount of losses being carried back. This means that businesses can benefit from the previous years' losses, increasing their potential for financial recovery. In summary, these changes to the R&D Tax Credit have been designed to make it more beneficial for both SMEs and large organisations. The increased rates of return, combined with a reduction in corporation.
What are the new R&D Rules?
The new rules for claiming R&D Tax Credits are relatively straightforward. All businesses must have a qualifying R&D project running in the UK, and they must be able to demonstrate that their activities meet the criteria laid out by HMRC. The businesses also need to have undertaken a minimum level of investment into research and development activities in order to qualify.
The amount of R&D tax relief or credit that a business can claim depends on its size and the type of activities they undertake. Smaller businesses usually qualify for the SME scheme, which is more generous than the large company scheme. The rate of return is also higher for those claiming R&D Expenditure Credit, and this is something that businesses should take into consideration when deciding which type of tax relief to claim.
Many R&D Expenses ceased to be deductible in the year that they occurred, instead, businesses are expected to capitalise their expenses for 5 years for domestic activities and 15 years for foreign activities.
In addition, businesses should also consider the new rules regarding the carry-back of losses. This provision means that businesses can now use previous year’s losses to offset their current tax liabilities, making the scheme more favourable for those looking.
How Much R&D Can You Claim?
The amount of R&D tax credit or relief you can claim depends on the size and type of your business, as well as your eligible expenditure. In general, businesses with an annual turnover below £2 million may be able to claim up to 230% of their eligible research and development costs, while larger companies will receive a more modest 150% relief.
The maximum amount of relief available is £2 million for SMEs and £10 million for large companies. However, businesses should be aware that the actual value of their claim may vary depending on their specific situation, such as the number of employees they have, how much they invest in research and development activities and whether or not they operate in a certain industry.
It is also worth noting that the amount of relief available could be higher or lower than stated above depending on the type of expenses being claimed for. For example, if you are carrying out activities that are considered to be ‘exceptional’ then you may qualify for an additional 10% tax credit on top of the standard rate.
Jeremy Hunt’s Spring Budget 2023 brought about a range of changes to the existing R&D Tax Relief scheme, with SMEs set to gain increased benefits through higher rates of return and flexibility when it comes to carrying back losses. Additionally, businesses need to be aware of the new rules regarding eligible expenses and the maximum amount of relief that can be claimed. All in all, these changes are set to make R&D Tax Relief more beneficial for SMEs operating in the UK.