One of the key announcements from the Autumn Statement was Jeremy Hunt’s cutbacks to the R&D tax relief scheme for small and medium-sized enterprises (SMEs). Despite the chancellor reaffirming the Government’s commitment to R&D, this announcement didn’t come as a surprise, given recent reports of R&D abuse and fraud.
For R&D expenditure incurred on or after 1 April 2023, the additional tax deduction for SMEs will reduce from 130% to 86%, and the SME tax credit rate – the amount that you can surrender your eligible R&D losses for a cash repayment – will reduce from 14.5% to 10%.
In contrast, the research and development expenditure credit (RDEC) – the scheme available to large businesses and SMEs in certain circumstances – will increase from 13% to 20%. For companies within the RDEC scheme, a net credit of 10.5% is currently available, which – following yesterday’s announcements – increases to 15%.
Prior to the Autumn Statement and the forthcoming increase in Corporation Tax to 25%, a loss-making SME could claim back 33% of its qualifying expenditure. This will now reduce to 18.6% – a concerning announcement for start-ups and struggling businesses.
For profit-making SMEs, the calculation isn’t quite as straightforward. From 1 April 2023, companies with profits of £50,000 or less will pay a small profits rate of 19% Corporation Tax, while those with profits of £250,000 or above will pay 25%. Companies with profits between £50,000 and £250,000 will pay Corporation Tax at 25% reduced by a marginal relief – effectively meaning businesses will pay tax on a sliding scale between 19% and 25%.
Prior to the Autumn Statement and with a current Corporation Tax rate of 19%, profit-making SMEs received additional R&D tax relief at 24.7% of their qualifying expenditure. However, in light of the above complexities, R&D tax savings now have several different scenarios.
A company within the Corporation Tax rate of 25% that remains in the 25% bracket after R&D will see a slight decrease in their additional rate of relief to 21.5%, whereas a company that starts off in the 19% bracket and remains there will see their additional benefit slashed to 16.34%.
There are multiple scenarios to consider with the end benefit differing considerably based on the size of the profits or losses in question.
Despite these complications, the tax relief scheme continues to reward companies performing R&D activities.
HMRC explains that these changes are a step towards a simplified, single RDEC-like scheme, meaning further reforms are expected. Any move to simplify the scheme and tackle abuse is a positive step, however, many businesses that are genuinely claiming R&D tax relief may see a significant reduction in the cash benefit to their innovation.
Along with the changes announced yesterday, the Government is continuing its proposed plans to tackle abuse of the scheme. This includes:
- Having a registrable person who supports the claim from both the claimant company and the agent preparing the claim
- Companies that haven’t claimed before making a pre-notification within six months of the company year-end
- The disallowance of sub-contractor costs where the work has been performed outside of the UK
- Submission of the claim through HMRC’s new portal
There is still much discussion concerning these changes, particularly overseas sub-contractor costs and pre-notification – both of which are causing issues amongst advisors whereby genuine claimant companies will lose out on relief they should be entitled to. As always, we’ll be monitoring any announcements over the coming months as to whether further changes will be made before the above reforms come into effect in April 2023.
On reflection, it is more important than ever to seek the support of an R&D expert to see if your business is eligible to make a claim.
For help and advice, speak to our skilled R&D advisors today on 0161 703 2500.