Don't get caught out by new R&D tax credit rules

Changes are coming into play for accounting periods starting on or after 1 April 2023

Encouraging businesses to invest in innovation has long been seen as key to the UK’s future prosperity.

Companies conducting qualifying development work can claim government-backed tax reliefs of up to a third of the associated costs currently. As a firm, we are seeing increasing numbers of our agriculture sector clients embracing technological advancements and seeking out scientific and technical improvements – making these reliefs particularly relevant. Many companies don’t realise that what they are doing qualifies as research and development (R&D), however in this sector, there is a huge amount of science involved and that means a claim may well be possible.

The following are just some example areas within the agriculture sector that could qualify:

Arable

• Improving or developing new harvesting methods
• Disease or pest protection or prevention
• Development of irrigation systems
• Improvement in crop yield
• Resistance to environmental factors
• New crop growing techniques, for example vertical farming

Livestock

• Development of monitoring systems
• Breeding programmes to improve yield or prevent diseases
• Feeding methods or meal formulation
• Animal housing and welfare

Diversification

• Waste reuse or repurposing
• Integration of renewable technology, anaerobic digestion plants for example

What are the new R&D rules?

It’s clear that HMRC has become aware of some claims which have been submitted incorrectly and, in some cases, fraudulently. In light of this, they have increased scrutiny on all claims and we have seen more activity from tax officials requesting further information on a number of submissions. They have also recently changed their stance on what constitutes subcontracted activity, denying R&D relief in certain cases.

Changes are coming into play for accounting periods starting on or after 1 April 2023. Overseas subcontractors and externally provided workers will no longer be eligible, except in very specific circumstances, in an effort to focus the relief on supporting UK innovation and jobs.

HMRC is also looking to tackle abuse of the scheme by introducing some new steps. These include requirements for claims to be made digitally, as well as full disclosure on the technical details and cost breakdown. Claims must be endorsed by a named senior company officer, and there will be a requirement to notify HMRC in advance of your intention to make a claim within six months of the end of the relevant accounting period (which for some will prevent last minute claims).

For expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium-sized enterprises (SMEs) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.

More structural changes to the R&D tax credits scheme have been expected for several years and the uncertainty around possible further changes – and HMRC’s current approach to auditing R&D claims – is unhelpful for innovative UK businesses but is likely to persist.

This is a complex area and one we can help you navigate but, in short, care needs to be taken to ensure you don’t fall foul of HMRC’s changing approach and the updated rules.

Please get in contact with a member of the R&D team to discuss any queries you might have.