R&D (Research and Development) tax credits have been a fantastic boost when it comes to SMEs being able to invest in research that betters their business. The tax credits have provided a generous allowance that’s opened the door for more small businesses to get new products and services onto the market.
From 1st April 2023, the UK government has introduced changes to its R&D tax relief. The changes are hoped to reduce fraud within the system and create more opportunities for genuine, innovative businesses. The criteria have also been expanded to include newer industries that were previously overlooked.
What is R&D in a small business context?
As a small business owner, you’ll find R&D can take many forms. In essence, it’s the gathering of knowledge to develop new products or services or improve those you currently offer. There are two main types of R&D:
Basic research. This is where you acquire knowledge for your business that you’ll then use to feed into strategic decisions or serve as the foundation for further R&D projects.
Applied research. This is much more specific and involves working towards a defined objective. This could be an aim to use a certain type of new technology, expand into a new market, cut costs or improve safety. This kind of R&D then often requires a ‘development phase’ to achieve the end goal.
The ‘development phase’ is the stage at which the research starts to translate into a product or process. This is where you’ll involve designs, prototypes, trials, tests and refinement.
It can be helpful to think of R&D costs as falling into five categories:
- Subcontracted costs
- Costs incurred in the employment of external staff (like agency workers)
- Raw materials directly used in R&D, i.e. utilities and other consumables
- Software costs
Let’s take a look at the changes and what they’ll mean for your business.
Changes from 1st April 2023
The overhaul of the R&D tax relief system will widen the scope of what businesses can claim, meaning more SMEs will be able to apply. However, the alterations are also less generous so it’s important to be aware of how it might affect your cash flow.
1. The SME deduction rate will decrease
The changes will see the SME additional deduction rate reduced from 130 per cent to 86 percent, and will apply to expenditure incurred on or after 1st April 2023.
What this means in context:
Under the current scheme, if you spend £100,000 on R&D, you could claim tax relief on £130,000. Taking corporation tax into consideration at 19%, this means you would save £24,700.
From 1st April 2023, if you spend £100,000 on R&D, you’d only be able to claim tax relief on £86,000. Taking the rise in corporation tax into consideration at 20-25%, this means your maximum saving would be £21,500.
2. There will be a decrease in the SME payable credit rate that can be claimed for surrenderable losses
The changes mean loss-making companies will see a hefty fall in the SME payable credit rate, from a maximum of 33 per cent cash back to 18.6 per cent. The ‘surrender’ rate will also drop from 14.5 per cent to 10 per cent.
What this means in context:
Under the current scheme, if you spend £100,000, you could claim £33,000.
From 1st April 2023, if you spend £100,000, you’d be able to claim £18,600 if your business is loss-making, and £16,340 if it’s profitable.
3. The rules around expenditure inclusion and exclusion are different.
The changes bring news that makes us very excited at Starfish. Anyone who’s spoken to us for five minutes knows how much we adore cloud technology. We’re Xero mega-fans, and it’s music to our ears that the upcoming changes will make cloud-based computing costs eligible for inclusion. UK businesses are adopting more of this technology (woohoo!), often at a significant cost, so being able to claim for it will be a much-needed helping hand for SME balance sheets.
The overhaul also means that staff time spent on cloud-related R&D can be claimed, and datasets and licensing fees will be eligible for expensing. Cloud computing isn’t the only new area included in the changes. Some costs relating to pure mathematics will be eligible under the new rules, as well as research such as quantum computing and deep tech.
From April, new criteria will also apply to where R&D is conducted. If conducted outside of the UK, either by yourself or a third party on behalf of your business, the R&D costs will no longer be eligible for tax relief to incentivise it taking place in the UK.
4. The submission system is changing.
Previously, HMRC accepted R&D claims submitted by post, but the changes from 1st April will mean businesses must use the online system for any claims. The digital application will have to be signed by a named senior officer in your company, and include details of the advisor who makes the claim. The overhaul will also require first-time applicants to give six months’ advanced notice to HMRC that they intend to make the claim.
Questions around your R&D claim? We can help
The upcoming changes might seem daunting with all the facts and figures to get your head around, but we’re here to support you with your claim. Even if you aren’t claiming any R&D costs at the moment, your business is likely investing in R&D activities without realising it. It means there may be areas where you could be claiming money back.
That’s where we come in. We leave no stone unturned when it comes to seeing where you might be able to save, diving into every nook and cranny of your business. Every pound is important when running a small business, and you know that too. Now’s the time to get in touch so we can give you the support you need with your claim.