R&D Tax Credit changes – Good news and bad news | Insights

The Autumn Statement 2022 announced changes to the R&D Tax Credit regime. There was good news, but there was also bad news.

Download:

Briefly, the Autumn Statement announced that for expenditure on or after 1 April 2023, the R&D Expenditure Credit (RDEC) rate for large companies will increase from 13% to 20%, but the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. The government will also consult on the design of a single scheme.

The bad news – Rates for SMEs

If we take a business with £100,000 of qualifying R&D expenditure, the rate changes announced in the Autumn Statement will significantly reduce the enhanced tax relief and tax credits available under the SME scheme for R&D Tax Relief:

Current rates
				Tax rate / Tax credit rate	Maximum benefit of claim (£)	Maximum benefit of claim (Pence per £1 spent)
Additional tax deduction	130%	130,000	@	19%	24,700	0.25

Enhanced tax relief	230%	230,000	@	14.5%	33,350	0.33

New rates: effective 1 April 2023
				Tax rate / Tax credit rate	Maximum benefit of claim (£)	Maximum benefit of claim (Pence per £1 spent)
Add'l tax deduction	86%	86,000	@	19%	16,340	0.16
	86%	86,000	@	25%	21,500	0.22

Enhanced tax relief	186%	186,000	@	10.0%	18,600	0.19

The reduction in the SME rates will affect a great many genuine claimants.

These include those entrepreneurs with the novel ideas and belief to take the risk to invest in innovation to bring new products and solutions to market, to the benefit of the UK economy.

R&D Tax Credits are a valuable source of funding for such innovation and the subsidy they offer helps to de-risk investment particularly in start-ups and early-stage business.

For those companies claiming the repayable R&D Tax Credit the significant (c.45%) reduction in the value of this important cashflow could mean their development activity has to slow down or even stop while they source new investment or funding.

This could delay commercialising their technology and increases the risk of not getting to market at all!

However, whilst the SME regime will be less generous going forward, it is worth remembering that this will still provide an extra 86% of enhanced tax relief from 1 April 2023 and a repayable tax credit worth up to 18.6p for each £1 of qualifying expenditure, so still of real value.

Couple this with the effects of inflation on staff costs and consumables etc then, where this expenditure relates to qualifying R&D, it might be reasonable to expect some uplift to the level of qualifying costs to which the new rates will apply.

The change also only comes into effect for expenditure incurred from 1 April 2023 so, if there is current development activity in your business, it is worth checking now to make sure you are not missing out on the benefits of the SME R&D Tax Credit regime, where it is possible to look back up to 2 years.

The justification given for the reduction in rates is fraud and error, where HMRC have formed the view that the attractiveness of the SME scheme is a target for abuse.

Given HMRC’s increasing scrutiny it has never been more important to select a reputable R&D Tax Credit advisor, ideally one regulated by one of the main accountancy bodies like the ICAEW or Chartered Institute of Tax.

That way, you can be sure that they are obliged to follow the principles of the PCRT (Professional Conduct in Relation to Tax), and this should help ensure that your claim is robust.

The good news – RDEC rates

Taking an example where a company has £1m of qualifying expenditure under RDEC, the increase in rates will mean a company should benefit by 15p for each £1 spent on qualifying activity, a 42% increase in the value of this relief from 1 April 2023:

Current rates
	RDEC rate / Main Corporation Tax rate
RDEC	13%	130,000

Taxed at 19%	19%	24,700

Net benefit of RDEC		105,300

Benefit of claim (Pence per £1 spent)		0.11

New rates: effective 1 April 2023
	RDEC rate / Main Corporation Tax rate
RDEC	20%	200,000

Taxed at 25%	25%	50,000

Net benefit of RDEC		150,000

Benefit of claim (Pence per £1 spent)		0.15

This should have the advantage of making the UK an attractive place for larger businesses to base their R&D activities.

Jeremy Hunt said in his speech: “So as a former entrepreneur, I had to get it in somewhere… I want to combine our technology and science brilliance with our formidable financial services to turn Britain into the world’s next Silicon Valley.”

He will be hoping this means that large businesses will locate their top talent in the UK, developing a bank of intellectual property to sell to the world, and building teams of highly skilled, highly paid workers, which will in turn drive growth in the UK economy and contribute income tax and social security contributions into the exchequer.

Other news

We already knew about some other changes which take effect for companies with accounting periods commencing on or after 1 April 2023,

See our earlier article - Upcoming R&D Tax Relief Changes.

Looking forward

Further changes to R&D Incentives appear likely, where the government have noted it is their aim to reform the current R&D regimes into one simplified RDEC style incentive for all.

It will be vital that the new regime supports the most R&D intensive SME and early-stage companies which are key to the future growth of the UK economy.

Further information

If you want to find out more about R&D Tax Relief and how this can benefit your business, head to our R&D KnowledgeHub or contact a member of our R&D team.