Important reforms to the SME and research and development expenditure credit (RDEC) schemes have been announced today as the government seeks to optimise its return on research and development (R&D) investment: £20 billion per annum by 2024/2025, rebalance the support available to SME and RDEC claimant companies and further combat abuse. The Autumn Finance Bill 2022 will legislate for the reforms to the value of SME and RDEC supports, and they are expected to apply for expenditure incurred on or after 1 April 2023. We await the draft legislation for details.
Key announcement for SME scheme claimants
The additional deduction for R&D expenditure will reduce from 130% to 86% and the payable tax credit will reduce from 14.5% to 10%.
This means that loss-making SMEs will be able to claim a payable tax credit of £18,600 per £100,000 of qualifying R&D expenditure (previously £33,350). The tax benefit to profitable SMEs will generally be up to £21,500 per £100,000 of expenditure (previously £24,700) for those companies subject to the new 25% corporation tax rate, or £16,340, where the 19% corporation tax rate applies.
Key announcement for RDEC scheme claimants
The RDEC rate will increase from 13% to 20%.
This means that the net tax benefit for RDEC claimants will increase to 15% from 10.53% for those companies subject to the new 25% corporation tax rate from 1 April 2023. The increase in RDEC rate should help mitigate the impact of the proposed removal of overseas costs from all R&D tax claims.
The continuing R&D reform agenda
These reforms reflect that the government has identified the RDEC scheme as being more effective in achieving policy objectives, such as creation and retention of high value jobs, than the SME scheme. It stimulates more private investment in R&D per £1 of government support.
The R&D reform agenda will continue more broadly as a consultation will be launched regarding the proposed simplified single RDEC like scheme. In better news for SMEs, the consultation will consider any further supports needed for R&D intensive SMEs that will be impacted by the above change. Further legislation is expected in the Spring Finance Bill 2023.
R&D claimants will be aware of increasing HMRC scrutiny and we expect this to continue as the Chancellor has announced increased HMRC resource to tackle abuse.
Other announcements to promote R&D activity
The Chancellor has reaffirmed the government’s support for R&D in the UK economy and the vital role it has to play in increasing growth and productivity. Several announcements aim to improve the overall R&D environment:
- Confirmation of innovation funding of £2.6 billion through Innovate UK and a £1.6 billion investment in the Catapult programme supporting the commercialisation of innovation
- Measures to support workforce training and upskilling which is key to innovative companies being able to carry on R&D in the UK
- ‘Solvency 2’ reforms to free up capital for investment in the economy
- Infrastructure development support including in relation to broadband (Project Gigabit), the rail network and the decarbonisation agenda
- Refocusing of the Investment Zones programme to catalyse key knowledge-intensive growth clusters
- A review of retained EU laws to identify changes that will promote growth in R&D intensive industries like digital technology, life sciences, green industries and advanced manufacturing
- Expansion of the Seed Enterprise Investment Scheme (SEIS) and Company Share Option Plan (CSOP) schemes and a commitment to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) schemes
- Confirmation of the Annual Investment Allowance at £1 million from 1 April 2023
While today’s announcements will be welcome by many larger R&D claimants, they will be of concern to innovative SMEs. The upcoming consultation however provides hope that the impact on genuine SME claimants will be mitigated. It is positive that the Chancellor has reconfirmed the government’s overall commitment to R&D support and improving how the overall business, regulatory and infrastructure environment supports innovation in the economy. However, how R&D support is distributed will change.
These are interesting times in R&D tax and, in addition to the recent SME cap and legislative reforms released this summer, claimant companies will need to get a handle on further new legislation before the end of 2022 and in Spring 2023. Being well informed and prepared will be key to successful adaptation in a changing R&D tax world.
We have a strong working relationship with HMRC and a track-record of participation in government consultation processes and in supporting our clients through change.
See our previous post on R&D tax reliefs for other important reforms to be implemented from this date.