We went into 2022 knowing there would be big changes on the cards for R&D tax relief. It more than met those expectations.
Compliance was the theme of this year, with HMRC confirming how it would aim to crack down on fraudulent claims, with the Treasury thought to have lost an estimated £469million to fraud and error in the last year.
Meanwhile, multiple changes in Prime Minister and Chancellor brought three financial statements, with R&D featuring heavily.
A lot of the changes to R&D tax relief will come into effect next year. Here’s a look back at the announcements that brought us to this point.
Major changes to R&D claims announced
In February, HMRC completed a consultation into how submitting R&D claims would look very different.
These changes, which come into effect in April 2023, mean:
The legislation is being updated to allow for claims on data sets and cloud computing from April 1 2023, while subcontractor and externally provided worker costs relating to activities taking place overseas can no longer form part of an R&D claim, except in special circumstances.
In March, the Chancellor at the time, Rishi Sunak, announced that data storage costs and pure mathematics would become allowable expenses. We await further details on how pure mathematics will be defined in the legislation.
A rise in enquiries
In the summer, HMRC’s crackdown on fraudulent claims began in earnest. HMRC paused the payment of a minority of claims while irregularities were investigated, and this slowed the process down for everybody.
The R&D tax industry unfortunately remains unregulated so these enquiries help to raise standards by holding those entering poor quality or fraudulent claims to account.
We also found out that eight arrests had been made in respect of R&D tax relief fraud.
In September Britain had a new broom and, with Liz Truss at the helm, came the Mini Budget. Her chancellor, Kwasi Kwarteng’s announcements did not focus on R&D but he did lay out changes to Corporation Tax, the Annual Investment Allowance and unveiled a generous Capital Allowances programme for investment zones.
The markets took a dim view and, in the blink of an eye, Truss and her chancellor were gone — together with their uncosted plans.
R&D targets met
This autumn, the ONS changed its methodology for calculating UK R&D spending, which meant that, with the stroke of a pen, the Government apparently met its 2.4% of GDP by 2027 target.
The ONS believes its figures underestimated private sector R&D spending, particularly from small businesses.
However, more work is being done to evaluate these figures, and so the official results won’t be released until the end of next year. It remains to be seen whether the UK will be given a new Government target proportional to its ongoing ambitions.
Another Chancellor, another Budget. Chancellor Jeremy Hunt’s announcements at the Autumn Statement brought disappointment for SMEs with changes to R&D tax relief rates.
Next year, for SMEs, the uplift rate on tax relief will fall from 130% to 86%, and the tax credit rate will drop from 14.5% to 10%, for expenditure after 1 April 2023.
The rate for the Research and Development Expenditure Credit (RDEC) scheme will increase from 13% to 20% for expenditure over the same period.
This is being legislated for in the Autumn Finance Bill 2022, and is a step towards the Government’s development of a single, simplified RDEC-like scheme for all companies.
April 2023 is going to bring about enormous changes for all involved in R&D tax relief, including businesses and accountants.
Not everything is completely clear yet either — we still await further details on how companies should notify HMRC in advance of making a claim. Companies that have made at least one claim in the past three years won’t have to do this but this still means many first time claimants could end up missing out. They will have only six months from the end of the accounting period to notify HMRC that they plan to claim.
We’ll be paying close attention to the development of a new single R&D scheme, and its impact on SMEs. We expect more details in the 2023 Spring Statement. Next year is already shaping up to be just as busy as the last.