Chancellor Jeremy Hunt released the 2022 Autumn Budget on November 17th, and it included some pretty significant changes for R&D tax relief.
Hunt wants to “ensure public money is spent effectively and best supports innovation”. This means that steps will be taken to simplify the current R&D tax credit system and rebalance the rates of relief.
Changes can be scary, so let’s get the facts straight. We’re here to break down everything you need to know about how R&D tax relief has been impacted by this budget.
Tax relief schemes
There are two schemes available for R&D tax relief claims: the small and medium-sized enterprises (SME) scheme and R&D Expenditure Credit (RDEC). These schemes differ in the amount they offer and who they cater to.
The SME scheme is used by smaller businesses with less than 500 employees, turnover of less than €100 million, or a balance sheet under €86 million.
RDEC is typically for larger companies that exceed the SME scheme requirements. However, SMEs are also eligible for this scheme if they have received government funding.
What are the major changes?
The Autumn Budget proposed considerable changes for both schemes, which we’ll summarise for you here:
The SME R&D Tax Credit Scheme
From April 2023, the additional deduction rate for SMEs will decrease – shifting from 130% to 86%. Further deductions have been introduced for tax credit rates, going from 14.5% to 10%.
Through these changes, profit-making companies' tax benefit will decrease from 24.7% to between 16.34% to 21.50% (depending on the Corporation Tax rate), while for loss-making companies the benefit will decrease from 33.35% to 18.6%.
The reason for these changes is that the government is concerned about abuse of the scheme’s generosity, which they investigated earlier this year. It’s one half of the government’s plans to “rebalance the rates of relief” and goes hand-in-hand with their adaption of the RDEC scheme.
R&D Expenditure Credit (RDEC)
In contrast, there is a positive change under the R&D Expenditure Credit scheme. Hunt has pledged to increase expenditure rates, with tax relief rates increasing from 13% to 20%.
The reason for this is the belief that RDEC is better value than the SME scheme, despite being less internationally competitive.
These increases will encourage innovation, improve the competitiveness of the RDEC scheme, and ensure more effective spending of taxpayer funds.
Simplification of the scheme
Another key aspect of the budget was the announcement of a simplified R&D tax credit claim system in the future. This begins with government consultations on designing a single scheme – an “RDEC-like scheme for all”.
This is another positive step towards a more efficient R&D process - maximising the effectiveness of taxpayer funds and supporting business growth.
Expansion of qualifying expenditure
Once again, plans to expand qualifying R&D expenditure were included in the budget. These reforms were first announced in the Autumn 2021 Budget and are set to be legislated in the Spring 2023 Finance Bill.
While the new Budget states that only costs incurred within the UK are eligible within an R&D Tax Credit claim, data and cloud computing costs will now qualify, helping to refocus support towards innovation and improve compliance. These too will come into effect in the Spring 2023 Finance Bill.
What does this mean for start-ups?
Start-ups usually fit into the SME tax relief scheme, so will likely face some claim reduction in their next R&D Tax Credit claim. However, this isn’t always the case.
Companies who receive government grants for research and development-related projects can claim tax credits on this funding through the RDEC scheme - essentially, this allows you to claim back tax credits from free money you have already received from the government – a no brainer!
There are also future benefits for innovative SMEs outlined in the budget, such as Hunt’s promise that public funding for R&D will increase to £20 billion by 2024-25, or his pledge to “work with industry” to identify SME support needs.
The Office for Budget Responsibility (OBR) also found that the budget poses “no detrimental impact on the level of R&D investment in the economy”.
There’s still a huge amount of benefit for start-ups looking to claim back R&D tax credit, and it remains one of the best incentives for innovation and technology in the UK.
How Claim Capital can help
In light of these changes, you may want some advice regarding your R&D Tax Claim. If so, get in touch with our team of R&D tax specialists. Our end-to-end tax credit service is a result of years of expertise, delivering over £25.8 million in R&D Tax Credits and helping our clients further invest in their innovative products and services.