The Government published draft legislation in July 2022 covering significant reform to the UK’s Research and Development tax incentives to be effective from 1 April 2023. With this date imminent, let’s discuss what these changes mean.

The Government stressed the objectives of the legislative changes are to produce a modernised and cost effective scheme with greater compliance. They produced additional draft guidance near the end of December, showing how these reforms will work in practice as well as highlighting the new requirements for additional information which claimants will need to provide going forward.

Changes to R&D Tax Relief Rates

For expenditure incurred on or after 1 April 2023, the SME R&D enhanced deduction will decrease from 130% to 86%, the SME R&D credit rate will decrease from 14.5% to 10% and the RDEC credit rate will increase from 13% to 20%. 

The increase in RDEC is welcome and should make this scheme more competitive internationally. However, the RDEC provides a much more limited cash repayment and may not be as valuable to innovative startups.

Pre – April 2023 From April 2023
Loss-making SME Enhanced deduction: 130%

R&D credit: 14.5%

Benefit: 33.35%

Enhanced deduction: 86%

R&D credit: 10%

Benefit: 18.6%

Profit-making SME Enhanced deduction: 130%

Corporation tax rate: 19%

Benefit: (up to) 24.7%

Enhanced deduction: 86%

Corporation tax rate: 25%

Benefit: (up to) 21.5%

RDEC company RDEC credit rate: 13%

Corporation tax rate: 19%

Benefit (after tax): 10.53%

RDEC credit rate: 20%

Corporation tax rate: 25%

Benefit (after tax): 15%


What Reforms Have Been Announced?

  • Restricting relief on expenditure on overseas R&D activities;
  • Extending the definition of R&D to include pure mathematics;
  • Including data and cloud computing as qualifying expenditure; and
  • Introducing additional information and notification requirements.

These reforms are effective for accounting periods beginning on or after 1 April 2023 and apply to all companies under the R&D Expenditure Credit (RDEC) and Small or Medium Enterprise (SME) R&D claims schemes.

Impact of Reforms

Restricting relief on expenditure on overseas R&D activities

Expenditure on overseas R&D activities will generally no longer be qualifying. The exception to the general rule is where conditions necessary for the R&D are not present in the UK, and it would be wholly unreasonable for the claimant to replicate them in the UK. The guidance provides some limited examples illustrating how this may work (e.g. R&D related to volcanoes or tropical diseases not prevalent in the UK), or when legislation or regulations require that the R&D is undertaken in a specific location overseas. The guidance also suggests that HMRC may take a more pragmatic view in instances where the conditions could be replicated in the UK but not within time constraints.

Extending the definition of R&D to include pure mathematics

Prior to 1 April 2023 there was a limitation potentially preventing claims for advances in mathematics itself. This meant that it was unclear whether activities relating to pure mathematics met the definition and whether tax relief was unavailable.

From 1 April 2023 the BEIS guidelines have been updated to make clear that activities relating to pure mathematics now meet the definition and are eligible for R&D tax reliefs.

Including data and cloud computing as qualifying expenditure

The guidance provides general exclusions and examples of when data or cloud services will not be qualifying R&D expenditure, including where the company has the right to sell, publish, or communicate the data with a third party.

Introducing additional information and notification requirements

All companies will be required to submit an Additional Information form before or alongside their claim for accounting periods starting on or after 1 April 2023. Failure to do so will invalidate the claim. Please note, the form will be live in April 2023.

Currently there is no legal requirement to provide additional information to support a claim included in a tax return. Claimants will be required to provide information including agent contact details and a nominated R&D contact at the company responsible for the claim. HMRC are also proposing that technical details of a mandatory minimum number of projects are provided, up to a maximum of 10.

Whilst it has been generally accepted best practice to provide additional information in support of a claim, this requirement is likely to increase the compliance burden upon the vast majority of claimants in the future.

The full list of required information is provided in the draft guidance.

Who We Are:

Swanson Reed is one of the UK’s leading R&D Tax Relief consultancies. We manage all facets of the SR&ED tax credit program, from claim preparation and audit compliance to claim disputes.

If you would like to find out more about how your business could benefit from R&D Tax Credit, contact a Swanson Reed R&D Tax Advisor today.