18/11/2022, Comment off

Reforms to Research and Development (R&D) tax reliefs

A major change was announced in the Autumn Statement to the R&D tax credit scheme for small and medium-sized enterprises (SMEs). The additional deduction will decrease from 130% to 86%, and the SME credit rate that losses can be surrendered for payable credit will decrease from 14.5% to 10%.

This means that the current effective relief of 33.33 % on R&D expenditure in a loss-making company will be reduced to 18.6%. This will come into effect and apply to expenditure on or after 1 April 2023.

The Research and Development Expenditure Credit (RDEC) for large companies will increase from 13% to 20% which gives an effective relief rate of 15%. The government plans to consult on the design of a single R&D scheme, and will work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost for supporting R&D.

Previously, other changes were announced to the R&D tax relief scheme, which included expanding qualifying expenditure to include data and cloud costs, targeting abuse and improving compliance and refocusing the reliefs on UK based R&D activities. This change would only allow for costs incurred on R&D projects where the R&D activity took place in the UK and payments were made to UK based staff or contractors. However, there are expected to be a number of exceptions to this such as where it is necessary for R&D to be undertaken overseas due to geographical, environmental or social conditions not present or replicable in the UK, or where there are regulatory or other legal requirements for R&D to be undertaken outside the UK.

These changes will only apply for accounting periods beginning on or after 1 April 2023 but the exact details are still to be set out and will be legislated for in Spring Finance Bill 2023.

Daly Accounting Comments:

  • The changes announced in the Autumn Statement were prompted by reported fraud of the R&D scheme where unregulated advisers are submitting dubious claims. While some measures have already been taken to counter this abuse, it would have been better to tackle this fraud instead of reducing relief to genuine companies carrying out important innovation.
  • The changes do not come into effect until 1st April 2023 so claims for 2022 and the first quarter of 2023 will not be affected.
  • If possible, bringing forward planned expenditure should be considered.
  • Budgets which have been done for 2023 and beyond which included relief at the old rates will need to be revised.
  • The announced changes still need to be codified into law so potentially could be amended before coming into effect.
  • While reduced by these new measures, R&D relief is still significant and an important tax incentive for firms carrying out R&D.

Please contact us if you would like to discuss how these proposed changes might affect your business.