More changes have come for SMEs regarding R&D tax relief in this budget, changes that were already scheduled for 1 April 2023 include:
- Enhanced deduction which SMEs could claim for qualifying R&D expenditure would reduce from 130% to 86% .
- SME tax credit would reduce from 14.5% to 10% (the rate at which a company receives a repayable tax credit if the company surrenders losses which have been created by qualifying R&D expenditure).
- Restrictions would be introduced regarding the amount of overseas expenditure that could be included in R&D tax relief claims.
- For large companies Research and Development Expenditure Credit (RDEC) would increase from 13% of qualifying expenditure to 20%.
- The scope of qualifying expenditure will expand to include the costs of datasets and cloud computing.
- Claims will have to be made digitally, and the senior officer of the company and the agent will both need to be named.
- Businesses who have not made an R&D claim before will have 6 months after their year-end to inform HMRC of their claim.
The above points to a general reduction of tax relief available to SMEs, whilst making it more attractive to larger companies. A government that wants to turn the UK into the next Silicon Valley is reliant on the innovation of small businesses, which are being cut from the scheme. The primary driver for this has been government concerns about the abuse of the scheme. However, some in the tech sector have argued that instead of cutting vital innovation funding, the solution lies in the use of technology to solve the fraud problem. The sector has been calling out for a reversal of R&D tax rebates for SMEs, fearing for the fate of the national start-up ecosystem and UK innovation as a whole. There had been a suggestion that the SME regime may be merged with the large company scheme in the future, but at present, the two schemes continue to operate in parallel.
The R&D scheme announced in the Spring Budget which is to take effect from 1 April 2023 is targeted specifically at loss-making R&D-intensive SMEs. R&D-intensive SMEs are businesses whose qualifying R&D expenditure is worth 40% or more of their total expenditure. Changes that were announced:
- The restrictions on the amount of overseas expenditure that can be included in R&D tax relief claims will be delayed until 1 April 2024; and
- For SMEs who are heavily involved in R&D, the repayable tax credit will remain at 14.5% rather than the reduced 10%.
What does this mean in real terms for SMEs?
The repayable tax credit is only available to companies that have a loss that they surrender to HMRC. Under the current rules (which end on 31 March 2023) companies spending £100 on R&D, can obtain a repayable tax credit of £33.35. Under the new rules Companies heavily involved in R&D spending that same £100 on R&D will only receive a repayable tax credit of £26.97 by virtue of the reduced enhanced deduction – a loss of £6.38 for every £100 spent on R&D. Seeing an actual reduction in tax relief. However, this is still better than SME companies that don’t qualify for the additional credit available to R&D-intensive SMEs, who can claim £18.60.