Chancellor Jeremy Hunt delivered a blow for innovative SMEs when he announced in his Autumn Statement that the rate of SME R&D tax relief will be reduced from 130% to 86% for expenditure on or after 1st April 2023. He also confirmed the SME credit rate will decrease from 14.5% to 10%. In contrast, there was more positive news for large companies when he announced the Research & Development Expenditure Credit (RDEC) rate is going to increase from 13% to 20%.
The reductions in the SME scheme are another measure taken following the discovery of increased levels of error and fraud within the scheme. The government say the generosity of the SME relief has made it a target for fraud (although figures published don’t actually differentiate between error and fraud). Whilst RDEC is better value, it has a rate that is less internationally competitive and these changes seek to rebalance the rates of the reliefs.
Unlike other steps taken to prevent abuse of the reliefs, these reforms do nothing to address the root of the problem and only seek to prevent innovative SMEs from realising their full potential. Combined with the previously announced increase to a 25% rate of corporation tax for companies with over £250K profits, they are set to have a significant impact. Mr Hunt said these reforms aim to ensure that taxpayer support is as effective as possible whilst improving the competitiveness of the RDEC scheme.
The Autumn Statement document reports that this is a step towards a simplified, single RDEC-like scheme for all; something which the government will be consulting on. Ahead of the next budget they will also work with industry to understand what further support R&D intensive SMEs may require. The government remains committed to supporting R&D, and the amount of support provided to innovative businesses through R&D tax reliefs is forecast to increase.
As previously announced at the 2021 Autumn Budget, 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, and targeting abuse and improving compliance. These changes will be legislated for in next year’s Spring Finance Bill whilst the rate changes will be legislated for in the Autumn Finance Bill 2022.
With these impending rate reductions and HMRC’s continued focus on combatting error and fraud, it’s more important than ever that SMEs ensure they are claiming the full extent of R&D Tax Credits they are eligible for whilst remaining strictly compliant. R&D Funding Group is here to help if you would like to discuss how these changes might affect your business or to check you are claiming all you can. Our R&D tax experts have been preparing HMRC compliant claims for over 15 years. Please contact us for a free, no obligation consultation.
The full Autumn Statement document can be accessed here.