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Changes to R&D Tax Relief schemes announced in the Autumn Statement

While there were some rule changes expected for April 2023, we were not expecting cuts to the rates of R&D Tax Relief to be announced by the Chancellor.

James Geary Client Director and Head of Corporate Tax

The SME (Small and Medium-sized Enterprise) Scheme has involved an additional deduction of 130% of qualifying spend from taxable profits for many years, but from April 2023 this additional deduction will be cut to 86%. Of course, the main rate of Corporation Tax is also increasing from 19% to 25% at the same time which in itself would ordinarily result in an increase in the value of the relief. However overall this is still a cut in effective relief – broadly speaking, the Corporation Tax saving arising from the additional deduction will decrease from 24.7% to 21.5% of qualifying spend.

The payable tax credit rate will also reduce from 14.5% to 10% from April 2023. This applies where a loss making company opts to surrender its R&D tax losses for a cash payment rather than carry them forward against future profits. The effect of this for these companies is to reduce the maximum tax credit of 33.3% of qualifying spend down to just 18.6%.

At the same time as both of these changes, the rate of relief for the R&D Expenditure Credit (RDEC) is being increased from 13% to 20%. This is the scheme that applies to much larger companies, but it also applies to SME companies that are carrying out subcontracted or subsidised R&D (including where the project is grant funded). The RDEC itself is liable to Corporation Tax, so with the main CT rate increasing to 25%, this means the net RDEC (i.e. the cash benefit) will be 15% of qualifying spend from April 2023 (increased from the current net RDEC of 10.53%).

The government has stated that this is a first move towards unifying the two R&D schemes into a single one, and it can be clearly seen that the relief rates are converging. We therefore expect further changes, probably from April 2024 in due course, to move the rates closer together, or possibly to abolish the SME scheme altogether from that point. This is a disappointing move by the government, because even though they have been considering moving to a single scheme for some time, the tax professional bodies have strongly objected to such a move, on the basis that the decision is backed up by unreliable data the government holds on the “additionality” of the SME scheme – by which we mean the amount of additional R&D activity stimulated in the economy as a result of the scheme’s existence.

While there were some rule changes expected for april 2023, we were not expecting cuts to the rates of r&d Tax Relief to be announced by the Chancellor

Contact James Geary for more information by emailing james.geary@randall-payne.co.uk or call 01242 776000.