Research and development – key changes announced today
The Government has been signaling for some time that they are not seeing the benefit from the small and medium sized enterprises (SME) scheme they would hope for and expect. However, there seems to be more positive messaging about the large company (RDEC) scheme and it’s impact in stimulating economic growth.
It is, therefore, not surprising that further restrictions to the SME scheme were announced today, in addition to those changes announced during the Spring Budget – see here.
Whilst taking with one hand, the Chancellor gave with the other, and has declared that the RDEC scheme will become more generous. The changes are, though, perhaps not as significant as we, and others in the industry, were expecting.
A summary of the changes are:
For expenditure incurred on or after 1 April 2023, the SME scheme’s additional or enhanced deduction against a company’s taxable profits will decrease from the current rate of 130%, to just 86%.
The change will start from the date the rate of corporation tax increases to 25%, on taxable profits over £250,000. So, in cash terms, profit-making companies which would currently benefit from a corporation tax saving at an effective 24.7% rate will now only receive a tax saving of 21.5% based on their R&D qualifying spend. For smaller companies who will continue to pay corporation tax at 19%, even after 1 April 2023, the tax benefit will fall to just 16.34%.
The R&D Tax Credit available to SME’s in a loss-making position will decrease from the current rate of 14.5%, to 10%, for expenditure incurred on or after 1 April 2023.
When this measure is combined with the reduction to the SME enhanced deduction mentioned above, a loss-making company under the SME regime will now receive a cash refund at a rate of only 18.6p for every £1 of R&D qualifying spend, compared to the current rate of 33.3p for every £1. This is a reduction of nearly 45%.
Planning for the cash flow impact of these changes will be extremely important. It will also be critical to consider whether losses could be more beneficially used than simply ‘cashed-in’.
We also saw an increase to the RDEC rate.
For expenditure incurred on or after 1 April 2023, the RDEC rate will increase from 13% to 20%. Remembering that the RDEC credit is treated as a gross amount of income which is first taxable to corporation tax, the actual cash impact for companies claiming under the RDEC regime will change from the current rate of 10.53% to 15%, assuming that the company would be paying corporation tax at the rate of 25% from 1 April 2023.
In general, this seems to be the first, and very big, step towards aligning the RDEC and SME tax relief regimes. In the past, the differences in the regimes have been sizeable, but there has been criticism that operating two regimes is creating tax complexity, not simplification. Unfortunately for those businesses relying on the SME regime’s tax benefits to help fund innovation, employment and growth, the trajectory of alignment seems to be bringing the two schemes towards a middle ground, and cutting the relief available for SME’s.