What tech SMEs need to know about the recent changes in R&D tax credits

The world of Research and Development (R&D) tax relief has undergone significant changes as of April 1, 2023, and these transformations have particularly impacted businesses in the technology sector.

In a recent webinar, presented by Gravita, an accountancy firm specialising in financial advice for growing businesses, they explore the recent alterations to R&D tax credits and their implications for technology SMEs.

Understanding the key changes

The webinar highlighted three key points regarding the recent R&D tax credit changes:

Latest changes in R&D relief - emphasising that these changes are relevant to all companies involved in R&D activities. These changes are essential for anyone considering making an R&D claim.

Managing new reporting requirements - exploring what needs to be done and how it impacts business. It addressed the practical aspects of dealing with increased reporting obligations.

Application to the software and technology industry - insights into how these changes specifically apply to the software and technology industry, outlining key considerations and strategies for navigating these shifts.

Understanding the budget changes

The Spring Budget brought several changes that became effective at different times.

Key highlights include:

Rate changes

Changes in R&D tax relief rates, effective from April 1, 2023, significantly impacted both the SME and RDEC schemes. SME rates decreased, while RDEC rates increased, narrowing the gap between the two schemes.

High-intensity threshold

To mitigate the impact of rate changes, the concept of a high-intensity threshold was introduced. Companies can benefit from a higher credit rate if they can justify that 40% of their total expenditure relates to qualifying R&D activities.

Addressing compliance

One of the significant compliance burdens introduced is the Additional Information Form, which replaces the traditional R&D Technical Report. This form must be completed and submitted before the tax return containing R&D figures. Failure to do so may render the R&D claim invalid.

Qualifying criteria expansions

Some positive changes include the inclusion of cloud computing costs and pure mathematics as allowable qualifying criteria. This expansion is particularly beneficial for technology companies, making it clear that these expenses are eligible under specific conditions.

Transition to a single scheme

While not official yet, there has been talk of transitioning to a single R&D tax relief scheme. This move aims to provide equal benefits to all companies regardless of their size. It is part of the government's effort to support smaller and emerging businesses in their R&D endeavours.

What tech SMEs need to do

To adapt to these changes effectively, technology SMEs should consider the following strategies:

  • Review your R&D activities: assess whether you can bring more R&D activities in-house or utilise UK subcontractors to align with the changing rules on subcontractors.
  • Stay informed: keep yourself updated on the evolving landscape of R&D tax relief, including potential legislative changes.
  • Optimise your claim: consider the high-intensity threshold and whether it can benefit your company. Be prepared to adjust your claim accordingly when it becomes legislated.
  • Prepare for compliance: ensure that your company complies with the Additional Information Form and other reporting requirements to avoid issues with your R&D claims.
  • Plan ahead: anticipate the impact of restrictions on subcontractors effective from April 2024 and make strategic decisions accordingly.

The recent changes to R&D tax credits have created both challenges and opportunities for technology SMEs. By staying informed, adapting to the new landscape, and taking advantage of available benefits, tech companies can continue to thrive whilst strengthen UK industry.