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R&D tax relief – A changing landscape

Autumn Statement announcements

A “mixed bag” was the outcome as far as R&D tax relief is concerned, as announcements brought positive news for large companies with a substantial rate increase (from 13% to 20%) for expenditure from 1 April 2023 but disappointing outcomes for small and medium-sized enterprises (SME) whose additional deduction will decrease from 130% to 86%. In a further blow, the SME payable credit rate for loss-making companies accessing cash through this regime will decrease from 14.5% to 10%.


The stated intention is to move towards a simplified, single RDEC-like scheme for all, with the government committing to consult on the design of a single scheme to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D.


What does this mean?

When allied to the increase in corporation tax rates due in April 2023, these changes will reduce the benefits available under the SME arrangements and will most heavily affect small, loss-making companies where the cash benefit of a claim could fall by around 44%. For small profitable companies, the changes will be less significant, with the benefit falling by around 13%. The benefits of the RDEC scheme will go up by around 42%.


So, whilst large companies enjoy enhanced benefits, this is hugely disappointing for SMEs. In light of recent press coverage relating to the regimes, and the identification of fraud and error in SME claims, this is not a surprising result; reducing the appeal of the SME regime will no doubt reduce fraud in this space.


Changes already in progress

To accompany this, draft legislation is already in place to modernise the regimes in April 2023, finally recognising cloud computing and data costs, including pure mathematics as an eligible activity, and refocusing the relief towards innovation taking place in the UK. For the latter, there are some exemptions for overseas activity which is necessary due to geographical, environmental or social conditions and legal/regulatory requirements but this is a definite step to ensure the UK gains maximum benefit. As a result, many companies using overseas resources will see their claims drop, and in some cases significantly.


Notably, the legislation also includes measures to tackle abuse of the regimes and improve compliance. These changes are not especially onerous and are critical to securing the long-term future of these generous incentives.


Response?

We are urging businesses to keep calm and keep claiming (where appropriate, of course). These regimes continue to be an important part of the growth agenda and genuine R&D activity should be rewarded. The negative press surrounding spurious claims and targeted fraud has changed the outlook and the government is rightly looking more closely at how best to protect these regimes. This is to be applauded, and whilst this complex picture unfolds over the coming months our advice is that businesses should continue to explore and submit R&D claims. Robust, legitimate, fully supported claims remain a valuable way to reduce innovation costs, stimulate new ideas' development, and support growth.


If you would like dedicated support, please contact Teresa at teresa.latch@ela8.co.uk

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