Following the Autumn Statement, the chancellor, Jeremy Hunt, has announced two key changes to the R&D tax relief scheme which will take effect from 1 April 2023 (for expenditure incurred on or after that date). Adam Ellerington, senior tax manager at Markel Tax, talks us through the changes.
SME scheme
The rate of uplift has been reduced from 130% to 86%. But why 86%?
This is exactly two thirds of the old rate. So, the rate of relief has been reduced by one third. The R&D tax credit rate has been reduced from 14.5% to 10%.
R&D expenditure credit (RDEC) scheme
The RDEC rate has been increased from 13% to 20%.
The Chancellor states that, according to the Office for Budget Responsibility, these measures will have “no detrimental impact on the level of R&D investment in the economy”.
Corporation tax (CT) rate
This was already announced in October. As a reminder, the corporation tax will increase to 25% from 1 April 2023, affecting companies with profits of £250,000 and over. Companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate (marginal tax relief for those of you who still remember it).
So, whilst the SME rate is lower, some of this will be offset by the increased CT rate for some businesses. Equally, whilst the RDEC rate is higher, some gains will be balanced by the higher CT rate as the RDEC credit is taxable income. It’s never an easy or straightforward picture.
Here’s a very quick summary of the effective rates of relief now:
Old |
New Small CT Rate (19%) |
New Main CT Rate (25%) |
|
SME (profit-making) |
24.7% |
16.3% |
21.5% |
RDEC |
10.53% |
16.2% |
15% |
Overall, SME is lower and RDEC is higher. Marginal relief taxpayers will be somewhere between the small and main CT rates of relief.
However, the Government says it remains committed to investment in R&D and that “Public spending on R&D will increase to £20 billion a year by 2024-25, a cash increase of around a third compared to 2021-22. This is the largest increase in R&D spend ever over a spending review period”
These changes are apparently “a step towards a simplified, single RDEC-like scheme for all”. The report goes on to say:
“The government will consult on the design of a single scheme and ahead of Budget work with the industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D.”
This sounds like they might redesign the SME scheme to work similarly to the RDEC scheme (presumably with higher rates of relief).
As previously 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. These proposed changes were still only in draft form but will be formalised in the Spring.
Click here to learn more about R&D.
