Measure
As part of the ongoing reforms of the R&D tax incentive schemes, the government announced a change to the rates of relief for both small and medium-sized enterprises (SME) and Research and Development Expenditure Credit (RDEC) claimants. These changes continue the themes of ensuring the reliefs are fit for purpose, that taxpayer money is effectively targeted and that the generosity of the regimes, particularly the SME scheme, is not abused.
It was also confirmed that, as announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance.
All R&D claimants.
For those companies submitting claims under the RDEC regime, the rate will increase from 13% to 20% for expenditure incurred on or after 1 April 2023. As RDEC is a taxable credit, this coupled with the corporation tax rise to 25% will increase the net benefit to claimants to 15%.
For SME claimants, the additional deduction under the SME regime will decrease from 130% to 86%, and the SME repayable credit rate will decrease from 14.5% to 10% for expenditure incurred on or after 1 April 2023. For taxpaying companies, for every £100 spent on qualifying R&D additional tax relief of between £16.34 and £21.50 will be provided depending on the level of taxable profit. For loss making companies claiming the repayable credit, this will now be worth up to £18.60 for every £100 spent on qualifying R&D (reduced from £33.35).
The rate changes narrow the cash benefit awarded to claimants under the UK’s two regimes and the government has also signalled its intention towards a simplified, single RDEC-like scheme for all, with further consultation to come on the design of a scheme. Consideration will also be given as to whether further support is necessary for R&D intensive SMEs without significantly changing the cost of supporting R&D to the Treasury.
The rate changes for the RDEC and the SME enhanced deduction and repayable credit will take effect for expenditure incurred on or after 1 April 2023.
The measures previously announced for data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance will take effect for accounting periods beginning on or after 1 April 2023.
The government has signalled its continued support for UK R&D and innovation, ensuring the regimes remain internationally competitive. It was cited in the Spring Statement 2022 that the RDEC stimulates more additional private R&D expenditure than the SME regime and so it is perhaps unsurprising that the net benefit to RDEC claimants has been increased beyond its current rate. This is a welcome increase and for some RDEC claimants will help partly offset the restrictions on overseas expenditure expected to be legislated for accounting periods beginning on or after 1 April 2023.
Whilst it is important that any abuse of the schemes is addressed, the reduction in the SME rates, especially the reduction in the cash credit, will not be welcomed by small businesses legitimately claiming the relief. However, the government has announced it will consider whether there should be additional support for R&D-intensive SME businesses together with a consultation for a potential simplified and unified regime.