R&D tax relief reform update following Spring Budget 2023

Stuart Riley

Stuart Riley

Tax Manager

The Government is continuing to review the UK R&D tax relief system, which it recognises has a key role in incentivising R&D investment by reducing the costs of innovation.

Following the review of R&D tax reliefs launched at Budget 2021, the Government, through numerous fiscal events, has announced a raft of measures designed to target abuse and improve compliance, refocus support towards innovation undertaken in the UK, and support modern research methods. It is also implementing rate changes under both the SME and RDEC schemes, and has announced a consultation inviting views on the design and implementation of a potential single R&D tax relief scheme.

Following its various announcements, the Government received feedback from a number of sources including professional bodies, such as ICAS, CIOT and ATT, as well as the House of Lords Economic Affairs Committee. Much of the feedback published highlighted the importance of supporting R&D intensive SMEs, particularly those in the pre-trading stage. The timing of some of the proposed changes was also questioned, as some gave claimants and advisers very little time to prepare.  Recognising this feedback, the Government announced at Spring Budget 2023 that a higher rate of relief will be introduced for loss-making R&D intensive SMEs.  In addition, the Government announced that it will delay the restriction on certain overseas expenditure until 1 April 2024.

SME scheme and support for R&D intensive businesses

The Government previously announced a reduction to the rate of R&D tax relief available under the SME scheme for expenditure incurred on or after 1 April 2023, which would have resulted in loss making SMEs being entitled to a relief rate of 18.6% - a significant reduction when compared with the 33.4% relief rate previously available. The Government has now acknowledged the value of R&D intensive SMEs to the UK’s wider innovation ecosystem and will legislate to provide additional R&D tax relief for eligible R&D intensive SMEs. Effective for expenditure incurred on or after 1 April 2023, the higher rate of relief will be available to loss making SME companies spending 40% or more of their total costs on qualifying R&D. Eligible companies will be able to claim a payable credit rate of 14.5% rather than the newly introduced 10% credit rate for the SME scheme, resulting in £27 of relief for every £100 of qualifying R&D expenditure incurred.

It is important to note that this change will be legislated for in Finance Bill 2023/24 and eligible companies will only be able to claim once the legislation is in place. This may result in eligible companies having to claim the current 10% rate that applies from 1 April 2023, then submit amended claims once the legislation is in place.  The alternative to this would be to delay submission until the legislation is in place, thus pushing back receipt of any associated relief.

Overseas expenditure restriction delay

With a view to refocussing relief towards innovation undertaken in the UK, the Government previously announced a restriction on certain overseas expenditure. The restriction - which, subject to specific exemptions, will prevent companies claiming for subcontracted activities where the work is not undertaken in the UK - was due to come into effect for accounting periods beginning on or after 1 April 2023. A similar restriction which prevents externally provided worker costs from qualifying if the relevant individuals are not on a UK payroll was also due to come into force on the same day. These restrictions have now been delayed until accounting periods beginning on or after 1 April 2024, to allow the Government to consider the interaction between these restrictions and the design of potential single merged R&D tax relief scheme.

Potential merging of R&D schemes

The Government’s consultation on merging the RDEC and SME schemes closed on 13 March and it is now considering the responses.  The Government intends to keep open the option of implementing a merged scheme from April 2024 and will publish draft legislation for technical consultation alongside the publication of the draft Finance Bill in the summer. Any further changes as a part of the ongoing R&D tax reliefs review will be announced at a future fiscal event. However, it is clear that a single merged scheme represents the intended direction of travel.  Given this, combined with all of the other reforms announced over recent years, it remains an uncertain and challenging time for R&D tax relief claimants.  

Additional information form

In addition to the changes detailed above, the Government announced that for R&D tax relief claims to be valid the claimant will be required to submit an additional information form before or at the same time the claim is made. During the Spring Budget, the Chancellor confirmed that this will be required for all claims submitted on or after 1 August 2023.

Summary of changes

Companies would be forgiven for feeling overwhelmed by the amount and pace of change to the current R&D tax relief schemes. We have summarised below the key changes and when they are being implemented.

ReformBrief detailsImplementation date
Rate changes
SME scheme rate reduction

Enhanced deduction reduced from 130% to 86%, payable credit rate reduced from 14.5% to 10%.

Effective rate depending on company circumstances reduced to 18.6% - 21.5% from 25% - 33%.

Expenditure incurred on or after 1 April 2023
R&D intensive SMEs higher rate

Higher rate of relief for loss making R&D intensive SMEs.

Eligible companies spending 40% or more of total costs on qualifying R&D.

Effective rate of 27%. 

Expenditure incurred on or after 1 April 2023; however not legislated for until Finance Bill 2023/24
RDEC rate rise

RDEC rate will rise from 13% to 20%.

Effective rate increased from 11% to 15%.

Expenditure incurred on or after 1 April 2023
Categories of expenditure
Data licences and cloud computing 

Data licences and cloud computing services costs can be qualifying expenditure when used for R&D.

Accounting periods beginning on or after 1 April 2023
Overseas expenditureRestriction on certain overseas expenditure (subcontractors or EPWs) where the work is not performed in the UK, subject to specific exemptions.Accounting periods beginning on or after 1 April 2024
Compliance changes
Pre notification formNew claimants or companies which have not claimed R&D in the previous three years must inform HMRC of their intention to claim within six months of the end of the relevant accounting period.Accounting periods beginning on or after 1 April 2023
Additional information formRequirement to submit a digital additional information form to support claims.All claims submitted on or after 1 August 2023

Get in touch

If you have any questions with regards to how the proposed changes might impact your company, or any other R&D Tax Relief queries, please contact myself or Andrew McMillan.

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