In the government’s Autumn Statement 2022, Chancellor Jeremy Hunt announced new measures designed to lower inflation and boost the country’s balance sheet. As part of these new measures, a number of significant R&D tax relief changes were introduced.
With the announcement of the Spring Budget 2023, the Chancellor has reaffirmed that these changes will go ahead, resulting in some confusion among the UK’s business sector.
In this article, our expert team of tax advisors explains what these changes mean for your business.
Increased commitment to R&D spending (with caveats)
The government will increase R&D spending to £20 billion a year by 2024-25. This is the largest-ever increase in R&D spend and signals just how high research and innovation rank in the government’s priorities for economic growth. Part of this spending will be directed to Research and Development Expenditure Credit (RDEC) tax relief, with the RDEC rate set to increase from 13% to 20% for expenditure on or after April 1, 2023.
While this is good news for large UK businesses, SME R&D tax relief changes mean that small- to medium-sized companies will see the value of their claims reduced, with the enhancement rate shrinking from 130% to 86% and the credit rate from 14.5% to 10%.
These changes to tax relief rates are reportedly intended to ensure that taxpayer support for innovation translates to an increase in business investment in R&D, supporting the UK’s growth as an innovation hub on the world stage. The government also hopes the additionality ratio advantage of RDEC over the SME rate will make the UK an attractive place to invest.
The reduction in SME R&D tax credits is said to be part of a drive to improve compliance, reduce fraud and error, and increase the effectiveness of R&D tax relief as a whole.
It is important to note that the announced changes will only affect the expenses incurred for accounting periods beginning on or after April 1, 2023. Therefore, small- and medium-sized enterprises engaged in R&D activities will still be eligible to benefit from pre-April relief rates for accounting periods commencing before 1 April 2023.
Impact of R&D tax relief changes on RDEC claims
In October 2020, HMRC published an econometric model as part of its Evaluation of RDEC, concluding that RDEC had greater potential for additionality than the SME scheme. This implies that RDEC is considered to offer a higher return on investment for taxpayers’ money – explaining why the government has chosen to increase the generosity of RDEC claims.
The RDEC rate increase from 13% to 20% will result in a 42% increase in generosity (after tax) from 10.5% to 15%. An illustration of how these figures will impact RDEC claim values after April 1st, 2023, is shown below.
Impact of upcoming changes to RDEC R&D tax relief
Impact of R&D tax relief changes on SME claims
While larger companies accessing RDEC will see an increase in the generosity of the relief, the news for smaller companies claiming SME R&D tax credits is less positive. As part of a drive to improve compliance, reduce fraud and error, and increase the effectiveness of tax relief, the enhancement rate for SMEs will be reduced from 130% to 86%, while the credit rate will be reduced from 14.5% to 10%.
This drop in generosity is particularly significant for small businesses and will see the generosity of credit on the average SME claim drop from 44% to 19%. An illustration of how these R&D tax relief changes will impact SME claim values after April 1st, 2023, is shown below.
Impact of upcoming changes to SME R&D tax relief
Additional changes to R&D tax relief schemes
The government has also announced its intention to consult on the design of a single version of the R&D tax incentive similar to the RDEC approach. It has said it will work with UK industry to better understand the support needed by R&D-intensive SMEs.
It was previously announced that R&D tax relief will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards UK-based innovation, reducing abuse of the claims system, and improving compliance.
Can I still claim R&D tax relief retrospectively?
Currently, companies that have undertaken qualifying R&D activities can claim tax relief for an accounting period that has already been filed with HMRC, provided the claim is made within two years of the accounting period’s end. However, for accounting periods commencing on or after April 1, 2023, new rules will be implemented.
Companies will now be required to inform HMRC of their intent to file a claim within six months from the end of the period to which the claim relates. It is important to note that this rule only applies to companies that have not claimed R&D tax relief in any of the preceding three calendar years. Consequently, new claimants to the R&D scheme will have a six-month window to notify HMRC of their intention to make a claim, as opposed to the current two-year window. If a new claimant submits their R&D claim within six months of the end of their accounting period, there is no requirement for notification.
If you have never claimed R&D tax relief before, your accounts are fully in order, and you have an eligible R&D tax relief claim for FY 2021–2022, it is thus highly recommended that you apply by March 31.
We can help
Our expert team of tax advisors can help you navigate the changing R&D claims landscape and make sure your business gets the maximum claim you’re entitled to. Grantica’s HMRC-compliant assessment framework helps businesses identify all R&D activities suitable for tax relief and assist them through innovation funding applications with HMRC, offering professional expertise as well as complete transparency and confidentiality throughout the process.