R&D tax relief rates – the highs and the lows

2023 promises to be an intense period of change for R&D tax relief, with legislative reform already in train and more to come. So, what is changing?

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. That said, the benefit available remains critical for SMEs and our message remains unchanged: if you are carrying out eligible work, this is a valuable relief and you should keep claiming. As we have seen recently, the landscape is shifting quickly, and sometimes unpredictably, so we should not rule anything out.