By Becky Bowness, head of tax, Armstrong Watson
The Government has previously stated its intention to reform the tax relief that is provided to companies undertaking Research and Development (R&D) and, in line with the last few fiscal events (Budgets and Autumn Statements), the Chancellor has added yet more changes to the relief for small and medium (SME) sized companies.
Changes already scheduled from 1st April 2023:
- The Research and Development Expenditure Credit (RDEC) for large companies will increase from 13 per cent of qualifying expenditure to 20 per cent;
- The enhanced deduction which SMEs could claim for qualifying R&D expenditure will reduce from 130 per cent to 86 per cent;
- SME tax credit will reduce from 14.5 per cent to 10 per cent (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 will be introduced regarding the amount of overseas expenditure that could be included in R&D tax relief claims.
The general direction of travel has been to reduce the amount of tax relief available for SMEs, but to make the relief more attractive for large companies.
This seems to have primarily been driven by the Government’s concern that the SME scheme has historically been abused. There is continued thought that the SME regime may be merged with the large company scheme in the future, however, for the moment, the two schemes will continue to operate in parallel.
Changes announced during the Spring Budget:
- Restrictions on the amount of overseas expenditure that can be included in R&D tax relief claims will be delayed until 1st April, 2024; and
- For SMEs who are heavily involved in R&D, the repayable tax credit will remain at 14.5 per cent rather than the reduced 10 per cent. For these purposes, a company that is heavily involved in R&D is defined as one where 40 per cent of its “total expenditure” is incurred on qualifying R&D activities.
The Chancellor framed the second announcement as a generous additional relief, however, it is actually a reduction when a real comparison is made. This is due to:
The repayable tax credit is only available to companies that have a loss which they surrender to HMRC;
- Under the new rules, companies heavily involved in R&D spending £100 on R&D will only receive a repayable tax credit of £26.97 – a loss of £6.38 for every £100 spent on R&D compared to the current rules;
- However, this is still better than SME companies who don’t qualify for the additional credit available to companies heavily involved in R&D.
For these companies, £100 spent on R&D would equate to a repayable tax credit of £18.60, meaning they will be £14.75 worse off than under the current regime.
To discuss how the latest announcements impact your business contact help@armstrongwatson.co.uk or call 0808 1445575.
