23 November 2023
Non Stop Change: A Breakdown of R&D Tax Legislation Development
Following yesterday’s budget announcement, the National Insurance contribution cut from 12% to 10% seems to have claimed the spotlight amongst a plethora of other measures.
In this article, we will look specifically at the impacts that the last 12 months (including yesterday’s announcement) of legislative changes have had and will have moving forward for innovative UK businesses claiming R&D Tax Reliefs.
Bureaucracy, compliance, and reduction seemed to be the themes of the most recent legislation development, with April 1st, 2023 marking a turning point in the world of R&D Tax. We’ll start with bureaucracy; From the 8th of August 2023, companies must complete an additional information form to HMRC to support all their claims, alongside the financial assessment and detailed technical narrative. As a result, we may see self-claiming businesses having to invest in more time and resources whilst also opening themselves up for unintentional error – those of you who may have already gone through the submission of the AIF online will have noticed that the UI/UX element arguably requires a bit more ‘polishing up’.
The administrative burden for claiming R&D Tax Relief doesn’t stop here, though, as can be seen for first-time claimants or those who haven’t claimed in the last three financial years. Such companies will now be required to complete a notification form 6 months after the end of the period of accounts. Intended by HMRC to pre-emptively strike down ‘faulty claims’ and streamline the claim processing process, if a notification form wasn’t submitted on time, the change will result in companies foregoing the ability to claim retrospectively despite the statutory deadline to amend your Corporation Tax return still remaining at 24 months. Many Directors of SME's I've been speaking to will often wear more than just the one hat, meaning until the time comes to prepare their company accounts (often just before the 9th month after their financial year has ended) throughout the year, R&D Tax Credits will be about 57th on their priority list. This may quite likely result in companies who are early on in their journey failing to submit the notification form in time, hence missing out on this incentive.
After sifting through the administrative changes, let’s now get stuck into the numbers. On top of the above aspects of the legislation shake-up, the changes to the R&D Tax benefit will impact both SME’s and Large businesses alike, albeit some more positively than others. For example, from April 2023, SMEs have had their deduction rate reduced from 130% to 86%, along with their rate of surrenderable tax credit reduced from 14.5% to 10%. This effectively means that loss-making or low-profit SMEs will see a ca. 40% reduction in payable tax credits (i.e. cash into their business). Innovative SMEs and start-ups, heavily rely on R&D credits for cash flow and other funding purposes, so this change will naturally adversely impact their expenditure, business decisions and forecasting. On a positive note, any grant expenditure claimed back through R&D Tax Relief will have increased. Grant expenditure falls under the RDEC (Large company) scheme, which increased as a benefit from 13% to 20% as of April 1st, 2023. Businesses may leverage this, though Grant applications are typically arduous and resource-heavy, yielding a low success rate. For example, innovative UK grants have a notoriously low success rate, due to their commercial and competitive nature, further adding to the cost/benefit complexity businesses face in the coming years.
In another twist, following yesterday’s Budget, for accounting periods starting 1 April 2024 onwards, HMRC will merge the two schemes to reduce administrative burdens and confusion regarding which scheme companies should claim under. Based on the initial outline of the proposed changes, the merger seems welcoming, however, this will mean a profound change for SME’s as it will be based on the RDEC scheme as an above-the-line tax credit.
In the meanwhile, before the merged scheme is fully in effect from 2025 onwards, the recently added complexities are likely to result in delays on HMRC’s processing side in the short term, despite the long-term goal being to streamline claim processing. In the last two years, claims have taken anywhere between 1-3 months after submission to be paid out. This has been affecting businesses' cash flow, particularly for smaller businesses or startups relying on timely credits to fund ongoing R&D. For our clients, Walmer aims to provide a solution for that problem as we are rolling out an R&D lending product, where you can receive your benefit in advance of the claim being submitted.
The sheer amount of changes and complications is quite mind-boggling for the non-expert and has culminated in many accounting firms closing their R&D Tax services, particularly to SMEs. Why? The risk/reward no longer benefits them and many accountancy firms do not have the in-house technical expertise and manpower to prepare R&D claims which maximise return and are 100% compliant. The risk of an increasingly possible HMRC enquiry (and defending said enquiry) is often too great and deemed unmanageable. HMRC's randomised mass approach to enquiry checks earlier this year has become too unpredictable for some accounting firms who do not have a specialist R&D Tax department, to prepare for and efficiently deal with, leaving their resources stretched thin and reputation at risk.
To conclude, while some of these changes aim to streamline and modernise the R&D Tax Relief process, businesses will need to adapt to potentially higher administrative burdens and uncertainty in the short to medium term. These changes are exactly why Walmer Group exists - we aim to guide and navigate innovative businesses through these turbulent times.
From technical expertise to financial tax compliance, Walmer Group covers all grounds of R&D Tax Relief, allowing businesses to divert their attention to other aspects of running their companies.
It’s a little bit easier for us, as we live and breathe R&D Tax, day in-day out 😊.