One of the areas which was easily overlooked in Jeremy Hunt’s autumn statement was the proposed changes to the Research and Development (R&D) tax relief schemes currently available to both SMEs and large enterprises. The main updates for businesses to be aware of is the reduced generosity of the SME regime for R&D whilst larger enterprises who can claim the R&D Expenditure Credit will see the scheme become more advantageous.

Presently, under the SME regime, companies can apply 130% of the cost of relevant R&D work undertaken which immensely benefits them from a corporation tax perspective given the reduction in total taxable profits (TTP). However, from the new financial year commencing 1st April 2023, this percentage will drop to 86%. In confluence with the increase in the main rate of Corporation Tax to 25% for businesses with TTP above £50k, this will have a detrimental impact on SMEs which fall within this category and have previously used the SME regime.

The adverse impact is circa 3.2% given that previously the scheme would’ve been Corp Tax beneficial at 24.7% (being 19% x 130%) whereas from 1 Apr 2023 it will be only 21.5% (25% x 86%). Additionally, loss-making companies who apply for a cash R&D Tax Credit (RDTC) in exchange for their loss are about to experience further pain. At present, the percentage available for the loss suffered is 14.5% but this will drop to a mere 10%. In effect, a company incurring £75,000 of R&D costs could’ve previously received up to £25,012.5 (£75000 x 230% x 14.5%) in RDTC but the value of such a claim will drop to £13,950 (£75,000 x 186% x 10%) from 1 April 2023.

In contrast, the RDEC scheme has been made more lucrative. The RDEC is treated as a grant which may either be set off against the company’s other tax liabilities or directly paid to the company itself. Whilst the credit received by companies using the RDEC scheme is taxable, the percentage available to claim on R&D will shoot upwards from 13% to 20%. This should increase the net tax benefit too from 10.53%, being [13% x (1-19%)] to account for the fact that the grant is liable to Corporation Tax, to 15%, being [20% x (1-25%)].

The government’s rationale for these measures involves seeking to curb the abuse of the SME regime via false or exaggerated claims, both of which have allegedly been prevalent. Simultaneously, it is hoping for these changes to entice more companies to invest in the UK which is part of the Prime Minister Sunak’s drive to make the UK a global scientific super-power.

Have you or your business already made or are looking to make an R&D claim? Want to better understand what the tax implications will be? Then contact Cheylesmore Accountants today to enable us to provide you with an end-to-end service including advice on what can and can’t be claimed. Given the increased focus on UK-based activities for the purpose of the claim whilst expanding the range of activities available to claim, a trusted advisor could come handy to facilitate you in identifying areas you may be missing out on claiming or ensuring compliance with legislation by flagging where a claim can no longer be made.