Policy paper

Research and Development Tax relief reform changes

Published 15 March 2023

Who is likely to be affected

These changes will affect companies that carry out Research & Development (R&D) and claim R&D tax relief under either of two schemes - the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief, and some companies which have made a Patent Box election.

General description of the measure

R&D tax reliefs have a key role in incentivising R&D investment by reducing the costs of innovation. It is therefore important to ensure that the reliefs remain up-to-date, competitive and well-targeted.

Following the review of R&D tax reliefs launched at Budget 2021, the government announced the following measures, which will generally apply for accounting periods beginning on or after 1 April 2023:

Extending qualifying expenditure

To incentivise R&D using modern computational approaches, the government is extending the scope of qualifying expenditures to include the costs of datasets and of cloud computing.

Tackling abuse and improving compliance

To tackle abuse of the reliefs, all claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online) and be accompanied by a compulsory additional information form.

• The additional information forms will have to break the costs down across qualifying categories and provide a description of the R&D.
• each claim will need to be endorsed by a named senior officer of the company
• companies will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period of account to which the claim relates. Claim notification will only be required where a customer has not made an R&D claim during the period of three years ending with the day before the first day of the claim notification period.
• Additional information and claim notification forms will need to include details of any agent who has advised the company on compiling the claim
• The additional information form will be required for all claims made on or after 1 August 2023.

Measures to address anomalies and unforeseen consequences.

A number of changes will be made to correct anomalies and ensure the reliefs operate as intended. These include:

• allowing companies to claim RDEC instead where they had previously erroneously claimed SME relief and the time limit for amending claims has expired.
• clarifying that expenditure generally qualifies where a payment is made within two years of the end of the accounting period in which the expenditure was incurred. This is in response to a Tribunal finding of 2016 (TC/2015/06833)
• amending the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date as defined by paragraph 14 of Schedule 18 to Finance Act 1998. This will prevent companies which do not receive a notice to file, either because they fail to register or notify HMRC that they are dormant, from benefiting by having more time to make a claim
• Supporting businesses growing and transitioning from the SME scheme to RDEC, by providing that where an SME within a group exceeds the size thresholds for an SME, all companies in the group will retain SME status for one year afterwards. Under the current legislation, while the company itself retains its status, other companies in the same group lose their SME status straight away
• Amending the rule preventing relief for a company which is not a “going concern” so that where a company ceases to be going concern solely because of the transfer of a trade, and is otherwise viable, it may still claim.

Further consequential measures

The following further changes are being made to ensure the reliefs operate as intended:

• The Patent Box regime uses R&D definitions of qualifying expenditure as part of its calculations. As this package of R&D changes expands the categories of qualifying expenditure to include data and cloud computing costs, the relevant sections of the Patent Box rules require consequential amendment.

Background to the measure

The two schemes offer generous support to incentivise firms investing in R&D. At Budget 2021 the government announced a review of the reliefs, supported by a consultation with stakeholders. This consultation explored the nature of private-sector R&D investment in the UK, how that is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate.

Following the consultation, at Autumn Budget 2021, the government announced reforms to R&D tax reliefs and published a report in November 2021 setting out detail on a series of initial measures to reform the R&D tax relief system. These measures included the expansion of qualifying expenditures to cover data and some cloud computing costs and a package of measures to target abuse and improve compliance.

Following stakeholder feedback, Spring Statement 2022 announced further detail on these measures.

• Government intends to include all cloud costs incurred directly for R&D in the scope of qualifying expenditure.
• The government recognises the growing volume of R&D being undertaken which is underpinned by mathematics. To support this work, the definition of R&D for tax reliefs will be expanded to include all mathematics, – clarifying in particular that ‘pure maths’ can qualify.

The government has published draft legislation for stakeholder input for these measures, to come into effect from April 2023 with necessary legislation in the Spring Finance Bill 2023. Some of the changes will be delivered through supporting Statutory Instruments to be introduced by August 2023.

Detailed proposal

Operative date

The additional information requirement will have effect for claims made on or after 1 August 2023.

All other measures will have effect for Accounting Periods beginning on or after 1 April 2023.

Current law

The R&D tax relief for SMEs is set out in Part 13 of CTA 2009.

The RDEC is provided for in Chapter 6A of Part 3 of CTA 2009.

R&D is defined for tax purposes in section 1138 of CTA 2010, together with section 1006 Income Tax Act 2007 which confers powers on the Treasury to specify in regulations activities that are and are not R&D for corporation tax purposes.

Paragraphs 83A – 83E of Schedule 18 to Finance Act 1998 set out the administrative provisions for both RDEC and the SME R&D relief.

Patent Box legislation is set out in Part 8A of CTA 2010 ## Proposed revisions

All references are to CTA 2009 unless otherwise stated.

Extending qualifying expenditure

New definitions of data costs and of cloud computing costs will be added to section 1125 of CTA 2009, which at present defines both consumables and software costs for both reliefs.

Tackling abuse and improving compliance

R&D claims: Mandating digital claims. Secondary legislation will be introduced with effect from August 2023 to require that all CT returns that contain an R&D claim, including amended returns, must be submitted digitally through HMRC’s tax return portal.

R&D claims: provision of additional information. This measure inserts a new paragraph into Part 9A of Schedule 18 to FA 1998 (company tax returns etc: claims for R&D expenditure credits or R&D tax relief). After paragraph 83E (time limit for claims) it adds

• a new condition at section 83EA which specifies that the latest date for providing an additional information form is not later that the date on which the claim is made or amended by the company. New condition 83EA also provides HMRC with the power to make regulations setting out additional information to be provided in relation to a claim.
• A new condition at section 83EB which removes the ability for customers to reject correction notices in the limited circumstances where they have failed to pre-notify their claim or provide the additional information form. In those circumstances if the customer believes there to be an error in the correction notice the condition introduces a right to send written representations to HMRC within 90 days. HMRC will review the representations and either confirm, amend or withdraw the notice.

Secondary legislation will be introduced with effect from August 2023 setting out the additional information to be provided in relation to an R&D claim. This information will include a description of the R&D undertaken, breakdown of qualifying costs, detail of any agent who has advised on the R&D claim and space for sign off from a senior officer of the company.

Notification of claims. This measure amends Chapter 6A of Part 3 of CTA 2009 (Trade profits: R&D expenditure credits) and Chapter 2 of Part 13 of CTA09 (Additional Relief for Expenditure on Research and Development) . The requirement for companies to make a claim notification will be given effect by legislation inserted: after section 104A (R&D expenditure credits) at new section 104AA; before section 1046 (relief only available where company is going concern) at new section 1045A; and, after section 1054 (entitlement to and payment of tax credit) at new section 1054A.

New sections 104AA, 1045A and 1054A introduce the requirement to make a claim notification in order to make an R&D claim. The exception to this requirement is where a customer has made an R&D claim during the period of three years ending with the day before the first day of the claim notification period. The claim notification period starts on the first day of the period of account that contains the claim.

After section 1142 (“qualifying body”) new section “1142A “Claim notification” will be inserted providing HMRC with the power to make regulations setting out the form of the claim notification.  New section 1142B defines an R&D claim by reference to existing sections 104A, 1011 and 1054.

Secondary legislation will be introduced with effect from August 2023 setting out the information to be provided with the notification, and the form and manner in which the notification is to be made.

Measures to address anomalies and unforeseen consequences.

• Paragraph 83E of Schedule 18 to Finance Act 1998 will be amended to permit a claim for RDEC to be made where the claimant made a claim for SME relief under Part 13 of CTA 2009 but was not entitled to do so.
• New legislation (ss104Y(4) and 1139A(1)) will clarify that references to expenditure incurred on payments refer to payments that are made before a claim is made in respect of that expenditure.
• Paragraph 83E(1) of Schedule 18 to Finance Act 1998 (Time limit for claims) will be amended to define the time limit for making a claim.
• New legislation (section 1120A of CTA 2009) will clarify that where an enterprise was treated as an SME and a linked enterprise becomes large the first enterprise will continue to be treated as an SME for that accounting period and the following accounting period.
• New legislation (section 1120B of CTA09) will clarify that when an enterprise, which was treated as large only because a linked or partner enterprise was large, is acquired by an SME it will be treated as an SME in the accounting period in which the acquisition is made.
• The definition of “going concern” (ss 104T, 1046 and 1057 CTA 2009) will be amended to clarify that if a company’s accounts are not prepared on a going concern basis only because the company’s trade was transferred to another member of the group the accounts are to be treated as if prepared on a going concern basis.

Further consequential measures

Patent Box – Section 357BLB(5) and (7)(c)-(d)of CTA 2010 will be amended to reference the new categories of expenditure of datasets and cloud costs.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2022 to 2023	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
—	-20	-215	-290	-315	-340

The exchequer impact of this measure was set out at Autumn Statement 2022 and has been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Economic impact

This measure is not expected to have any significant macroeconomic impact.

Adjustments were made to take account of behavioural effects, including businesses adjusting their R&D expenditure in response to the measure.

Impact on individuals, households and families

This measure is not expected to impact on family formation, stability or breakdown.

There is no impact on individuals as these measures affect businesses.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have significant impact on the administrative burden of approximately 90,000 businesses claiming R&D tax reliefs. One-off costs would include familiarisation with the changes and updating systems to reflect them. Continuing costs could include a requirement to provide additional information to HMRC in the company tax return.

Estimates of the costs are shown in the tables below:

Estimated one-off impact on businesses (£m)

One-off impact	£(m)
Costs	negligible
Savings	—

Estimated continuing impact on administrative burden (£m)

Continuing average annual impact	£(m)
Costs	0.4
Savings	—
Net impact on annual administrative burden	+0.4

Customer experience could be affected as the measure amends R&D tax credit legislation and requires additional information to support a claim. This will be addressed by clear guidance to advise of changes, and by communications including through HMRC’s stakeholder forum: the Research & Development Communications Forum (RDCF).

This measure is not expected to impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The estimated operational costs for HMRC are in the region of £23m covering both IT and staff costs.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measures will be monitored through information collected from tax returns.

The current R&D reliefs have been subject to period econometric evaluation, providing a good baseline for future evaluations. HMRC are collecting more information which enables HMRC to better monitor the relief through, for example, clearer data on what is being claimed.

Consideration will be given to evaluating the policy after 5 years of monitoring data have been analysed and collected.

Further advice

If you have any questions about this change, please contact Yasmin Achha/ David Harris on   

Telephone: 03000 592504/ 03000 586834   

or email: [email protected] or [email protected]