Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax relief regime, including a cut to the deduction and credit rates for the SME scheme, the R&D tax credit.
The rate of the large company scheme, the R&D expenditure credit (RDEC) will be increased from 13% to 20%, while the deduction rate for the SME scheme will be reduced from the current 130% to 86%. Also for the SME scheme, the payable tax credit rate will fall from 14.5% to 10%.
The Chancellor commented “Despite raising revenue, the OBR has confirmed that these measures have no detrimental impact on the level of R&D investment in the economy. Ahead of the next Budget, we will work with industry to understand what further support R&D intensive SMEs may require.”
The government has committed to increasing the budget to support R&D overall, so there is likely to be increased opportunity for funding through grants. However - for SMEs, particularly those not currently turning a profit, this is a noticeable reduction in the cash benefit of making a claim through the R&D tax relief scheme. There will of course be ways of managing the change, such as carrying more loss forward to future years.
And it is also important to state, with these changes the R&D tax credit will still remain a substantial form of tax relief. The tax credit will still provide significant funds to support innovation, including refunds of up to 21% of R&D expenditure for SME’s.
The changes will only apply to qualifying expenditure falling after 1st April 2023:
So what will be the impact of these changes:
The government is effectively making the payout for loss-making companies less generous. This is in response to higher levels of fraud in the scheme. But it is unlikely to have a material effect in reducing fraud rates. Especially in the short-medium term, whilst those putting in fraudulent claims try to find a new place to focus!
For SME's the enhanced deduction will be reduced from 130% to 86%. If you're profit-making, this reduction will be partly counteracted by the higher rate of Corporation Tax. For loss-making companies looking to take the payable tax credit - the reduction is compounded by a fall in the payable tax credit rate from 14.5% to 10%.
Whilst most will welcome increased scrutiny of the incentive. The decrease in the rates for SME claimants is counter-intuitive to the government’s messaging on growth through innovation.
These changes will impact many companies in the earlier stage of innovation or loss-making innovators as the benefit rate will reduce from 33p in every £1, to around 19p. Conversely, for those larger businesses who qualify for the scheme, they will see a substantial increase in the tax saving.
While these changes might sound daunting - our team are on hand. We can help with any queries you might have on the proposed amendments and how it might affect your business.
The rate will increase from 13% to 20% which will provide a substantially improved benefit to companies eligible for RDEC. These include large companies, SMEs who are sub-contracted to perform R&D for large companies, and SMEs who are claiming state aid.
These changes are scheduled to take effect from April 2023, so there is time to plan. It will impact different businesses in different ways. Under the SME scheme, if you are expecting to be loss-making at this stage, the changes could reduce future claims by up to 44%. However, if you are profitable the reduction should be only 13%. Your R&D tax advisor should be able to help, and we will be reaching out to clients with specific advice.
It is also important to state, with these changes R&D will still remain a substantial form of tax relief. The scheme will still provide significant funds to support innovation, including additional refunds of up to 21% of R&D expenditure.
Find out about the upcoming changes on August 8th 2023 of submitting an additional information form to HMRC to support R&D tax credits claims.
Understand HMRC enquiries and compliance checks for R&D tax credit claims. Learn what triggers an enquiry and how to avoid getting an enquiry.
Discover how Green Steel, a recycling specialist secured an impressive £250,000 in Research & Development (R&D) Tax Credits.