Posted: 16 / 03 / 2023

Article by: Josh Perry, Head of R&D
Image: Posted by: HM Treasury and The Rt Hon Jeremy Hunt MP. Photographer: Andrew Parsons, OGL 3, via Wikimedia Commons

The Budget has seen the biggest overhaul of the R&D rules since in the introduction of the RDEC scheme in 2013, and perhaps ever.

In order to understand these changes, it is important to understand the context which has necessitated such change. The government has overpaid nigh on £500m in recent years to companies who were ineligible to claim. This meant the scheme had to be refocused, so the taxpayer got more bang for their buck, while also giving HMRC more resource to review more claims.

Additional information will be required when submitting a claim, including the name of the R&D advisors. This is a bigger change than most people appreciate, as for the first time, HMRC will be able to digitally track which agents are advising on which claims. This creates the capacity to target specific agents who are offering poor advice and ensure their claims are reviewed.

Refocusing claims towards UK based R&D. This was designed to avoid claims being paid out based on R&D which has not happened in the UK and the change is hoped to create more high skill UK-based roles as companies decide to onshore to get the R&D benefit. This change will now come in from 1 April 2024.

Digital prenotification. This required companies who have not claimed in the last three years to digitally notify HMRC of their intention to claim R&D six months ahead of the year end. This is designed to allow HMRC to screen applicants before they claim, and will also remove the ‘double bubble’ effect new claimants currently get by being able to submit for the previous two account periods. It should be noted that this change is highly contentious and is being challenged.

The reduction in effective credit rate for loss-making SMEs from 14.5% to 10% has been confirmed, meaning the scheme is now far less supportive of innovative start ups, who are highly probable to be in loss for their first few years trading.

The government have softened the blow above by allowing R&D-intensive companies – defined as having 40%+ of their costs spent on R&D – to maintain the 14.5% credit. The idea here is to support the most innovative businesses in the UK who are operating in R&D-intensive sectors like AI, Pharma, and Life Sciences. It is interesting that there are specific sectors named and quantified in the Budget. My view is that the government wanted to reward specific sectors like AI, life science, and pharma, but directly legislating that set sectors got special treatment would lead to allegations of inequality.

The RDEC scheme, which benefits larger businesses has seen an effective 65% spike in value from 13% to 20%. The most likely explanations for this change are to make the UK more attractive to on the world stage to the largest employers. Having such favourable treatment, will inevitably lead to better job creation as blue chips elect to create roles here to take advantage or the scheme.


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