What were the R&D tax changes announced at the Autumn Statement?
For R&D expenditure after 31 March 2023:
- The R&D Expenditure Credit rate (RDEC) will increase from 13% to 20%;
- The small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%; and
- The SME credit rate will decrease from 14.5% to 10%.
Increase in RDEC rate
It was of course positive to hear that the Research and Development Expenditure Credit (RDEC) will rise from 13% to 20%.
However, this is not so useful for smaller businesses as the RDEC doesn’t provide an upfront cash repayment that businesses can put straight into use.
Companies can use for the RDEC scheme if they, and all connected companies, employ more than 500 staff, or have a turnover of more than €100 million and more than €86 million in gross assets.
Reduction in SME relief
We were disappointed to see the R&D tax credit for SME’s cut from 14.5% to 10%. This is a blow to a vital source of funding for many innovative start-ups and small businesses in addition to the already announced tightening of the scheme eligibility (see below).
Here are examples of how the reduction in SME relief will affect claims:
A loss making company incurs £100,000 of R&D costs during an accounting period and decides to claim the R&D tax credit.
- Under the existing legislation that company would be able to claim a tax credit payment of £100,000 x 230% x 14.5% = £33,350
- As a result of the new legislation, the company’s tax credit payment will be reduced to £100,000 x 186% x 10% = £18,600
- The repayable credit has therefore nearly halved in value.
A profit making company paying tax at the new 25% rate post will see the following impact.
- Under existing legislation the company would see a reduction is tax payable of £100,000 x 130% x 25% = £32,500
- Under the new legislation, the reduction is tax payable is now £100,000 x 86% x 25% = £21,500
- Again a significant reduction in tax relief.
Further changes for R&D tax claims
There are further changes for the R&D schemes coming from April 2023. These are:
- Two new categories of qualifying expenditure will be introduced:
- Cloud computing costs – purchase, access and maintenance of both software and hardware used for remote data storage and systems operation
- Data costs – licences for access and collection of datasets used in R&D
- The definition of R&D to include pure mathematics as a qualifying activity for the purposes of the relief.
- There will be a requirement for all subcontracted work or externally provided workers to be located in the UK (there are some narrow exceptions for activities that absolutely require geographical, environmental, demographic or regulatory conditions that are not present in the UK).
- R&D claims will need to be filed digitally, breaking costs down across qualifying categories.
- Companies that have not made a claim in the past 3 years are also required to notify HMRC in advance of their intention to make a claim, within 6 months of the end of the accounting period that the claim relates to.
We can help with your R&D tax claims
Despite the tightening and reduction in reliefs, the R&D tax schemes remain attractive and valuable incentives for many innovative companies.
We have significant experience in calculating and substantiating claims for our clients across various industry sectors.
If you need assistance with making your R&D tax claim, please do contact us to discuss our R&D tax claim service and how we can assist.
With more than 20 years in tax, Paul provides tax compliance and advisory services to clients, and specialises in R&D and capital allowance claims.