UK R&D tax relief changes – are you ready?

Chancellor Jeremy Hunt has announced a variety of alterations to the UK research and development (R&D) tax credit regime within his Autumn Statement 2022. This included a cut to the deduction and credit rates for the SME scheme but there was a small benefit to larger companies.

SMEs

Currently, the enhanced expenditure scheme for small and medium-sized enterprises (SMEs) increases qualifying expenditure by 130%. That means that for every £100 spent, the company enjoys a deduction of £230 from taxable profits.

This may create or increase a tax loss. Where there are no other profits against which a loss generated by R&D expenditure can be set, the loss may be surrendered to HMRC in exchange for a payable tax credit at 14.5%. This scheme is particularly useful to start-up companies and those struggling to make profits in their early years.

It is also open to abuse, so the government is amending the scheme as a preventative measure.

For expenditure on or after 1 April 2023, the additional deduction will decrease from 130% to 86% and the payable credit rate will decrease from 14.5% to 10%. For a loss-making company with, say, £20,000 of qualifying R&D expenditure, the payable tax credit will reduce from £6,670 to £3,720.

Large companies

Large companies have a different scheme, the RDEC (Research & Development Expenditure Credit). This allows companies a taxable expenditure credit for qualifying R&D. While limiting the tax relief for SMEs, the Chancellor is boosting the RDEC from 13% to 20% from the same date.

These changes appear to be the start of a process of moving all companies to an RDEC-like scheme, something on which the government intends to consult. As previously announced, the R&D tax reliefs will also be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, targeting abuse and improving compliance.

Carpenter Box’s reaction to UK R&D tax relief changes

HMRC have confirmed they are cracking down on small and medium size enterprises making R&D claims. This is due to an increase in fraudulent claims. They propose to tackle this by:

• increasing their R&D team
• increasing the repayment window from 28 to 40 days to allow a more detailed check of the R&D claim
• in some cases, bringing in the fraud investigation service.

Further changes are expected in the coming months. These include companies who are looking to claim R&D relief needing to inform HMRC within six months of the end of the period to which the claim relates.

Given the shift in HMRC’s approach to R&D claims, it is crucial to ensure that you can demonstrate the accuracy of any R&D claims submitted. You need to be prepared to respond to any questions that HMRC may ask, should they choose to review your claim. Failure to do so could result in a longer and more detailed enquiry. If any errors are identified then you may also be liable to penalties as well as repaying any tax relief you received.

Furthermore, the proposed reduction in the rate of R&D relief for SME’s from 130% to 86% is disappointing and likely to make the UK less attractive to businesses looking to locate their R&D activities here.

If you have any questions on these changes, and how they could affect you, please get in touch or give us a call on 01903 234094