Research and Development tax credits changing in April 2023

What is research and development in business?

Every business had to start somewhere, developing a product that has market viability. The products you offer are never going to stay the same, and you may even need to expand what you offer. Research and development in business can be split in to two parts. The research side is to identify if there is a need for a new product or process, or whether you need improvements of an existing one. Research is also used to see if there is market viability for the new solution. The development side is to test and implement these into the existing business. Making changes over a period of time until the product or service is suitable. Businesses will be taking on a certain amount of risk, as this is an exploratory field. You could be spending thousands, if not millions on R&D, which is why HMRC research and development tax relief could be essential. 

What is research and development tax credit?

Developing your business is a risk, and the government understand this, so they offer a scheme called Research and Development tax credits. Often referred to as R&D, research and development tax credits are an incentive for businesses to invest in innovation projects; specifically in science and technology. These incentives can either come in the form of research and development tax relief, or research and development grants. The main difference is whether money is exchanged. Research and development grants are cash payments to the company, whereas research and development tax relief lowers your tax burden. The terminology from HMRC may refer to developments in science and technology, but the scheme is not sector specific, so many businesses can take advantage of the HMRC research and development tax credits.  

What are the 5 cost categories and are they changing?

These categories are staying in place, but what each one covers and allows is changing. The changes are significant, and could affect how your business operates.

Software costs

Investing in the systems you need to perform the jobs of the business. This can include, but not limited to, CRM, CAD, CAM, and design software. The term is deliberately broad as to encompass ever growing software solutions. For instance, the development of Machine Learning and Artificial Intelligence. 

External worker expenditure

This is related to labour such as agency workers. The classification of what is deemed acceptable as an externally provided worker, is outlined in the CIRD84100.

Subcontractor costs

Similar to the external worker expenditure, this is specifically in relation to subcontractor activities. You can find out more about what is covered under this cost category under CIRD84200.

Staffing costs

More self-explanatory, staffing costs are related to payroll, and other staffing costs accrued. 

Consumables

The materials you need to use in order to perform research and development. Any raw materials used are an expense that can be claimed through the HMRC research and development tax scheme.

How is the research and development tax credit changing?

The main changes to R&D tax credits are in relation to what the cost categories cover, and the rate changes. There is the SME scheme, and the RDEC scheme. The scheme you would use is dependent on the size of your company. The SME scheme, as the name suggests, is for Small and Medium sized Enterprises. The RDEC, Research and Development Expenditure Credit, is for the larger businesses. Within these schemes there are a lot of changes, some are removing criteria, and others are being added. The following changes will take effect as of 1 April 2023.

Removal of overseas R&D

To incentivise bringing more research and development activities to the UK, overseas R&D will no longer be eligible. The government wants to develop more skilled jobs in the UK, and lessen dependency on overseas labour. If you subcontract from outside of the UK, as of April, this will no longer be classed as a suitable research and development tax relief activity. 

Quantum calculations and mathematics are now eligible

Work involving nothing but pure mathematics was not previously accepted by HMRC for tax credits. The technology landscape has changed severely over the years, and a lot of development is now focused on the field of mathematics. Which means if your company works on quantum computing, machine learning, or DeepTech, you can finally apply for research and development tax relief.

Cloud costs are allowed

As with the introduction of pure mathematics, cloud-based technology will also be accepted. This is due to how the world has moved towards cloud-based technology, and the rules need to reflect this. This will include services such as AWS. The scope for cloud-based computing and development, means many businesses will be able to take advantage of the scheme. 

Claims will only be allowed via online

The most inevitable piece of news from HMRC’s updates to R&D, the claims will need to be made online. The government is moving more and more services to their online infrastructure, and this was merely the next organic step. As of the time of writing, the process has not been confirmed, but this what is known:

• There will be no alternate methods to submitting a claim, not by post, and not by email. You will need to use the online portal, and submit your research and development tax credit claim alongside your corporation tax return.

• Every claim needs to have a summary of the cost categories included within. This must include a brief description of the R&D activities that were undertaken. 
• The claim needs to be signed by a names senior officer. In most cases, this would be the company director. 
• If you have had assistance from an advisor, you need to name any and all of them in the claim.
• You now must give HMRC prior notice of a claim that you intend to make. This must be submitted within 6 months of the end of the financial period it relates to.

SME rate changes

The biggest changes that businesses need to be aware of, is how the rates are changing. According to the HMRC, the rates are being reduced due to the amount of fraudulent activity that was detected. These are the key rate changes:

• Enhanced deduction rate will be 86%, down from 130%.
• Surrender rates will be 10%, down from 14.5%. Effectively bringing loss-making companies maximum tax benefit down to 18.6% from 33%.

RDEC rate changes

Larger companies who qualify for the RDEC scheme will see increases to their rates. The rate will be 20% from April, which is up 7%, and the overall tax benefit will increase from 10.54% to 16.2%.

What changes to the cost categories are relevant to your business?

The expansion of what is covered under technology and software development is a huge bonus to many businesses. Even if you don’t work in technology specifically, you can take advantage of implementing the benefits. In relation to the serviced IT management sector, and subsequent industries surrounding it, you can now claim for innovative tech advancements that will streamline a lot of your processes. 

Augmented reality

The world saw a shift to virtual only spaces in recent years, with some offices choosing to stay completely remote. Augmented reality, AR, is simply using technology to enhance the physical space around you. Such as adding heads-up displays, HUDs, to a pair of glasses to give you crucial information about a project you are working on. The metaverse is one example of an augmented reality being used for businesses. Augmented reality also covers less advanced systems, such as interactive walkthroughs for real estate, or a virtual stand at an exhibition. If you work in the medical field, AR is also a great tool for training and diagnosis. 

Robotics

The more automation is being embraced; the more important robotics becomes. There are so many industries that already using some form of robotics, and the use cases are only growing. The automotive industry uses robots for repetitive tasks that need to be 100% accurate; the production line is quicker, and the fail rate is almost zero. 

Artificial Intelligence and Machine Learning

AI seems to be the biggest technology in the world currently, with software engineering companies building more and more advanced systems. The most common form of AI most people interact with, would be chatbots. Machine learning is more the technology that AI relies on to be more useful. Machine learning is where a system takes in data, uses that data to make decisions without external input, and use that data to see patterns. The algorithms used don’t give specifics on what the computer needs to do, but the platform for the machine to adapt and learn from new information.

Cloud computing

Every business is using some form of external cloud-based system; cloud just refers to technology you access from somewhere else in the world. Such as Office 365 using cloud-based storage for files. Cloud computing is virtually a necessity with big data; utilising offsite super computers to run data analysis. For the average business, cloud computing is most useful for disaster recovery. Have you ever thought what would happen if you just lost all your clients’ data? How would you get it back?

IoT

In your personal life, you probably have interacted with an IoT device today. The Internet of Things refers to devices that connect and communicate with each other, streamlining operations. It could be the office fridge sends a notification when the milk is set to go off, or it could be a security entry device that alerts a security company of an intruder. If the device can connect to the internet, it could be deemed an IoT device. IoT devices being accepted by the HMRC for tax relief is probably the most important change, and one most won’t know about. 

What other changes could affect your R&D tax credit claims?

The biggest change outside of the research and development tax credit schemes, is the increase in corporation tax. This rate is going to dramatically effect profit making companies, and make the process harder to follow. The complexity of the new corporation tax increase could change how much your R&D claim is worth. For smaller companies making less than £50k profits, they will continue to pay the 19% corporation tax rate. Over the £50k threshold, businesses will enter the new 25% corporation tax bracket, although, they will be able to claim some of that back through marginal rate relief. This means the SME scheme will allow for a higher relief rate, but the RDEC scheme will see the overall value decrease. 

How can First Base Solutions be used as part of your Research and Development tax credits?

Most of what First Base Solutions offers, utilises many of the newly accepted technologies. Integration of cloud-based services, hardware and software purchases, and the IoT devices. Disaster recovery is an often-overlooked service, that could cause a business to lose thousands in just the data alone. To find out more ways we can help your business with everything IT, and how it can be used towards your R&D claims, contact us today!