Spring Budget 2023: Research and Development Relief overview for contractors

This month’s Spring Budget 2023 placed a strong focus on boosting the economy.

One of the ways which the government proposes to achieve this is by reform to Research and Development Relief, writes Zeeshan Anwar, head of compliance at Dolan Accountancy.

What is Research and Development Relief?

Research and Development (R&D) Relief is a corporation tax relief that may reduce your limited company’s tax bill. But the relief can only be claimed if your company is eligible for this type of tax.

Companies which are eligible to claim for R&D are those that work on innovative projects within science and technology, and they look to research or develop an advance in their overall field (not just their business).

This might be a new process, product or service, or improving an existing product or service.

But it must relate to the company’s trade, whether this is a current one or one that will be started up based on the results of R&D.

Spring Budget changes to R&D

Rates

Large companies are able to claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects – it can also be claimed by SMEs and large companies subcontracted to do R&D work by a larger company.

Let’s take an example which contractors should be able to identify with.

Sadie runs her own limited company, with less than 500 staff, and a turnover of under €100 million. This means that she would be eligible for SME R&D relief, which has an extra deduction on qualifying costs.

However, due to the fact that Sadie has been subcontracted by a large company, the relief won’t apply to her situation – instead she will need to see if she has met the requirements needed to claim the RDEC.

Previously, the RDEC rate was set at 13%. However, for expenditure on or after April 1st 2023, the rate has now been increased to 20%.

SME R&D relief is available to smaller sized businesses and allows those eligible an extra deduction of their qualifying costs from their yearly profit, as well as the normal 100% deduction.

This extra deduction has now been decreased from 130% to 86%, plus the SME credit rate has also been dropped from 14.5% to 10%.

A higher rate (14.5%) of SME payable credit will apply to loss-making SMEs that are R&D intensive – this means that the ratio of the company’s qualifying R&D expenditure must be 40% or above its ‘total expenditure’ for the period.

Qualifying expenditure

Another change to R&D is that qualifying expenditure will be expanded to include the costs of datasets and cloud computing.

This changes represents great news for limited company contractors using these tools to enhance their development goals.

R&D claims to be made digitally

From August 2023, all R&D claims are to be submitted digitally and will need to be accompanied by a compulsory additional information form in order to provide more detail of the claim.

This means that businesses will need to create a breakdown of all qualifying costs and information on any agent who has advised on the R&D claim. There will also need to be space for a sign-off from a senior officer of the company.

Notifying HMRC of a claim

Companies that intend to make a claim will need to notify HMRC within six months of the end of the period of account to which the claim relates.

Overseas expenditure

In a bid to refocus support towards UK innovation, there will be restrictions on overseas expenditure relief – this was meant to come into effect this year but has now been postponed until April 1st 2024.

For those who are working on innovation outside of the UK, this postponement will feel like a small relief, and perhaps the overseas restrictions will be reflected on before the changes come into play next year.

Final thought

The UK government wants the economy to grow and is trying to support businesses to encourage innovation and stimulate growth. The R&D tax relief schemes are one way that this support is being given. However the government is taking with one hand while giving with the other; large businesses may see additional benefit from RDEC but the benefit for smaller businesses -- including limited company subcontractors -- under the SME R&D relief scheme has diminished.