Current system
Changes to R&D tax reliefs included in Finance Bill 2023
Changes announced at Autumn Statement 2022


A great deal can happen in a year – this is certainly true when looking back on 2022 and developments to the United Kingdom's research and development (R&D) tax system. The year began with the expectation of further details about significant changes to R&D tax reliefs that had been announced at the Autumn Statement 2021 by then Chancellor Rishi Sunak; it ended with a surprise announcement of further changes at the Autumn Statement 2022 by current Chancellor Jeremy Hunt.

With further substantial changes expected to be announced in 2023, potentially leading to a complete overhaul of the R&D tax credits system, the next 12 months could be even more eventful than the previous.

This article discusses the changes to the R&D tax credit system that have been confirmed and detailed during 2022 and are expected to take effect from April 2023, while speculating what could be on the horizon for the remainder of 2023.

Current system

Before discussing the changes being introduced in April 2023, it is useful to outline the two tax reliefs currently available on certain qualifying R&D-related expenditure. Both reliefs adopt the same definition of R&D and qualifying activities. R&D for tax purposes is defined by reference to activities that are treated as R&D under UK generally accepted accounting practice and fall within the Department for Business, Energy and Industry Strategy's guidance. Broadly, the guidance specifies that the R&D activity must take place within a project that seeks to achieve an advancement in science or technology. Currently, there is no requirement that R&D activity be undertaken in the United Kingdom for companies to be eligible for R&D tax reliefs. As explained further below, until April 2023, UK companies that incur R&D expenses overseas may still be eligible for full tax relief.

SME relief until April 2023
Where certain conditions are met, relief is available for small or medium-sized companies (SMEs) in the form of an effective deduction of 230% on qualifying R&D costs. Loss-making SMEs may have the option of receiving a cash repayment of the tax credit in return for surrendering R&D-related losses. Any repayment is capped at 14.5% of the losses available for surrender. For accounting periods beginning on or after 1 April 2021, any repayment is also subject to an annual cap of £20,000 plus three times the company's total pay-as-you-earn and national insurance contributions' liability.

RDEC until April 2023
An R&D expenditure credit (RDEC) is also available. Although primarily targeted at larger companies, it may be used and can prove valuable to SMEs in certain circumstances. The RDEC uses a different method of calculating corporation tax relief on R&D expenditure. The "above the line" RDEC is brought into account as a trade receipt, increasing taxable profits (or conversely reducing losses). A credit of 13% of the qualifying R&D expenditure is then credited to the company. In certain limited circumstances, a repayment may also be available.

Changes to R&D tax reliefs included in Finance Bill 2023

Draft legislation was published in July 2022 and will be included in the Finance Bill 2023 to introduce changes to three aspects of the relief system:

  • a territoriality restriction to limit eligibility for tax relief to UK-based R&D;
  • the definition of R&D and qualifying expenditure – this has been expanded to cover cloud computing and data costs and pure mathematics; and
  • the claims process – measures to combat abuse have been introduced.

New territoriality restriction
A territoriality restriction will be introduced, whereby a business will only be able to claim tax relief for qualifying expenditure on R&D activities undertaken in the United Kingdom. However, there will be an exemption where it is necessary for R&D to be undertaken overseas due to geographical, environmental or social conditions not present or replicable in the United Kingdom, or where there are regulatory or other legal requirements for the R&D to be undertaken outside the United Kingdom. The cost of the R&D and availability of workers to undertake the R&D are specifically excluded and will not be considered necessary for R&D to be undertaken overseas.

There are still areas of uncertainty regarding when the exemption will be available – for example, what will be included as "geographical, environmental or social conditions". It is hoped that any uncertainty or ambiguity in the exemption can be resolved before the legislation is enacted.

Definition of R&D and qualifying expenditure
The draft legislation also includes provisions to expand the categories of R&D expenditure that will qualify for tax relief, to include data licences and cloud computing. Qualifying expenditure should extend to all cloud computing costs associated with the R&D, including storage.

At the United Kingdom's Spring Statement in March 2022, the government also announced that it intends to amend the definition of R&D to cover pure mathematics. This change is currently expected to be introduced in secondary legislation and is also expected to take effect from April 2023.

Combatting abuse
New measures to combat abuse of the R&D tax reliefs system are also being introduced. These involve a requirement for all claims to be made digitally with endorsement by a named senior officer of the company and a requirement for advance notice to be made to His Majesty's Revenue & Customs (HMRC) before making a claim – unless the company has made a claim in one of the previous three accounting periods – with details of any agent who advised the company making the claim.

Changes announced at Autumn Statement 2022

Given the publication of the draft legislation, it would have been reasonable to expect no further changes to the R&D tax relief system to be introduced in the short term. Therefore, it was surprising when the chancellor announced significant changes at the Autumn Statement in November 2022, which would also take effect from April 2023.

Rate changes from April 2023
In relation to the SME tax relief system, the rate of the repayment tax credit is being cut from 14.5 to 10% from April 2023 and the additional deduction from 130% to 86% (reducing the effective deduction to 186%). Meanwhile, the rate of the RDEC is increasing from 13% to 20% from April 2023. The changes have been introduced in the Autumn Finance Bill 2022 that is expected to receive royal assent before the end of 2022.

The changes to the SME tax relief system are hugely disappointing and are likely to be detrimental to innovative start-ups. The cash repayment element of the SME tax relief system often provides a vital source of financing to start-ups. With a reduced cash repayment, many start-ups may struggle to secure adequate funding to progress R&D and ultimately new UK-based innovations. Reduced tax reliefs may prove to be an insurmountable stumbling block, particularly to start-ups in the life sciences sector and those focused on developing technology to support the United Kingdom's net zero transition, which may have limited access to other sources of finance. The increase to the RDEC is to be welcomed. However, the RDEC provides a more limited cash repayment and therefore is not as valuable to innovative start-ups – the RDEC tends to be used by larger businesses that are less reliant on a cash repayment as a source of financing for new R&D endeavours.

One of the stated drivers to reduce the SME tax relief was the prevalence of abuse within the R&D tax relief system. It had been hoped that the government would seek to combat abuse by improving compliance measures and increasing investment in HMRC, rather than by reducing the availability of relief. As detailed above, draft legislation has already been published introducing changes to combat abuse. It is disappointing that the government has proceeded to cut SME tax relief now rather than wait to see whether the new anti-abuse measures being introduced from April 2023 are effective.

Further changes in 2023
Beyond changing the rate of tax reliefs available, the government also announced that it would consult on the design of a new single R&D tax relief system to replace the two existing forms of relief. There is currently scant information available about how the Treasury envisages that the new system might work and what characteristics from the current system will be retained. It is expected that further details will be published in Spring 2023.


Any new UK R&D tax relief system should safeguard the interests of SMEs, for which the availability of tax reliefs may be a significant factor when deciding whether to develop a new innovation in the United Kingdom or elsewhere. Therefore, when designing a new system, some of the characteristics that are often vital to start-ups when seeking to claim R&D tax relief should be retained, such as the cash repayment element and the ability to subcontract R&D while still claiming tax relief. The government's statement that it will work with industry to understand whether further support is necessary for R&D-intensive SMEs provides a glimmer of hope that this may still be possible.

It was previously hoped that further changes would focus on how R&D tax reliefs can better incentivise UK investment in green technologies to support global decarbonisation (for further details, see "Review of R&D tax reliefs – where are we now?"). It is hoped that this remains possible – that designing a new R&D tax relief system provides the government with an opportunity to work with industry to address how R&D tax reliefs can better incentivise UK innovation, while safeguarding the interests of SMEs and combatting abusive practices.

For further information on this topic please contact Penny Simmons at Pinsent Masons by telephone (+44 20 7418 8250) or email ([email protected]). The Pinsent Masons website can be accessed at