Spring Budget 2023 – Partial reversal of R&D tax credit cuts for R&D-intensive SMEs
The Autumn Statement 2022 announced considerable cuts to the generosity of the Small and Medium-Sized Enterprises (SME) Research & Development (R&D) tax relief with effect from 1 April 2023. A welcomed adjustment of the new rules was announced in yesterday’s Budget, reducing the impact of decreasing R&D rates on R&D-intensive SMEs.
16th March 2023
Marketa Pasova See profile
To recap, the following changes to R&D SME tax relief rates were announced in the autumn:
For R&D expenditure incurred on or after 1 April 2023, the SME additional deduction will decrease from 130% to 86% and the SME tax credit rate will decrease from 14.5% to 10%.
In practical terms, this means that the additional tax benefit of an SME R&D claim will drop from 24.7% to 21.5% for profitable SMEs paying their Corporation Tax at 25%, and to as low as 16.3% for SMEs who will remain within the 19% Corporation Tax rate.
The biggest benefit reduction is to loss-making SMEs surrendering their losses in exchange for repayable R&D tax credits, who will see their cash credit slashed from 33.3% of the qualifying R&D expenditure to 18.6%.
For a full article summarising the previously announced changes to the R&D regime, click here.
The disproportionate impact of the changes on the pre-revenue and early stages R&D intensive companies seems at considerable odds with the Government’s pledges to make Britain a “tech and science superpower”. The potential detrimental impact of the tax credit cuts on the UK’s start-up ecosystem has been subject to much commentary and concern since the announcements in November 2022. The most affected industry groups have been mounting pressure onto the Government to reverse the changes.
Although we are obviously disappointed not to see a wider rollback of the R&D tax relief cuts, it is reassuring that the Government has listened to the industry’s feedback to some extent and introduced a concession for those most impacted by the upcoming changes – a new additional R&D tax relief for R&D-intensive SMEs.
SMEs will be eligible for the additional relief if they meet an R&D intensity ratio condition, i.e. 40% of their total annual expenditure is expenditure eligible for R&D tax relief. The existing definitions of R&D eligible expenditure will apply. The total expenditure will be defined as any expenditure deductible as revenue expenditure for Corporation Tax purposes, including R&D expenditure which is capitalised as an intangible asset.
For eligible companies, the additional deduction rate will be reduced to 86% with effect from 1 April 2023 as announced in the Autumn Statement, but the loss surrender rate for R&D tax credits will remain at the current 14.5% rather than decreasing down to 10%. Therefore, only loss-making companies will benefit from the additional relief.
The repayable tax credit for R&D-intensive companies will decrease from the current rate of 33.3% to 27% of qualifying R&D expenditure, but this is considerably more generous than the upcoming reduction to 18.6% impacting all other loss-making SMEs.
Eligible companies will not be able to submit a claim using the increased tax credit rate until the changes are legislated and CT600 forms are updated, summer 2023 at the earliest. The affected companies can either delay their claim or submit a claim using lower rates and amend once the legislation is in place and updated CT600 forms are available.
Anti-avoidance measures will be put in place to prevent manipulation of the R&D intensity ratio calculation. In particular, the R&D intensity test will be applied to connected companies in aggregate.
The introduction of what is effectively a third R&D tax relief scheme contradicts the Government’s intention to simplify the UK’s R&D tax relief system. There is a recent consultation into a possible merge of the Research and Development Expenditure Credit (RDEC) and SME scheme, with a particular focus on simplification and R&D intensive companies, which ended only three days ago. A summary of responses is to be published on Legislation Day in July 2023.
Overall, the announcement of the new additional R&D relief has the feel of a last-minute decision with many aspects left to be fleshed out in the upcoming months. With further changes to the R&D tax reliefs in sight, it is unlikely that the new measure will be more than a short-term makeshift transitional step. However, it would be hardly surprising if the core principles of the announcement are strongly indicative of Government’s preliminary thoughts on how the future reformed R&D tax relief regime may look like for R&D intensive SMEs.