R&D tax relief is changing

Since its inception, the UK’s R&D tax credit scheme has offered a valuable incentive for businesses carrying out innovative work, creating, or improving new products and processes.

Companies that qualify can deduct an extra 130 per cent of costs from their taxable profit - those that are loss-making could receive a tax credit of 33p for every £1 incurred.

On July 20, draft legislation was released heralding major changes for the R&D tax credit regime.

Here’s what you need know:

New eligible expenditure

Qualifying costs were previously limited to staff, sub-contractor, software and consumable costs.

HMRC has now included additional categories including data, cloud and pure mathematics costs.

This is good news for those engaged in the latest technology advances, particularly in AI, robotics and machine learning.

Refocusing on UK innovation Relief for subcontracted work will now be limited to UK activity.

Expenditure must be either ‘UK expenditure’ or ‘qualifying overseas expenditure’ (in that there’s a justifiable reason for undertaking R&D outside the UK such as legal or geographical restrictions).

R&D claim procedure

Finally, several measures have been introduced to tackle abusive claims including specifying the format of claims.

An important new condition is that companies intending to make their first claim must notify HMRC within six months of the end of their accounting period – meaning companies may miss out if they are not prepared.

The latest changes will take effect from April 2023 - companies intending to make a claim should seek early advice on the potential impact these rules may have.