Clamping down on fraudulent or incorrect R&D claims has been on the government’s agenda for some time, with HMRC figures suggesting that £469 million was lost due to this in 2021–2022.
And so during the Autumn Budget the Chancellor announced various reductions to the R&D tax relief scheme, which were criticised by industry professionals, and by SMEs who are heavily reliant on these tax credits. Fortunately the Chancellor listened to these concerns and during the Spring Budget earlier this year he announced that SMEs who are classed as ‘R&D intensive’ would benefit from additional tax relief.
All of these new changes came into effect on the 1st April 2023.
Tax relief changes announced in the 2022 Autumn Budget
The Chancellor announced the reduction of two R&D tax rates that specifically apply to SMEs:
- The SME enhanced deduction rate was reduced from 130% down to 86%.
- The SME payable credit rate was reduced from 14.5% of the loss surrendered to 10%.
For loss-making companies, this would reduce their cashback rate from 33% to 18.5%.
Yet larger companies actually saw an increase in their tax relief during the Autumn Budget, with the RDEC rate increased from 13% to 20%.
Additional tax relief announced in the 2023 Spring Budget
After the autumn announcement of the tax reductions for SMEs, many companies expressed their concern that reducing the payable credit rate to 10% would put many businesses at risk of having to cease trading – specifically those that rely heavily on this tax credit to fund their developments until their new product is launched.
In response to this, the Chancellor announced additional tax relief for R&D-intensive SMEs. This means that qualifying SMEs who spend over 40% of their total expenditure on qualifying R&D costs will be able to claim the previous payable credit rate of 14.5%, leaving them with a cashback rate of 27%.
To work out whether your SME qualifies for this, you’ll need to measure the expenditure listed in your company’s profit and loss account, plus the additional amount in the R&D claim less any non-deductible expenditure.
A catch-22 situation
For many SMEs, these R&D changes are a bit of a catch-22 as they make it more difficult to budget for any new R&D projects. This is because it’s unlikely that you’ll know whether you meet the R&D-intensive criteria until you pull your total costs together at the end of your accounting year. Not knowing whether you qualify for the extra relief will no doubt make it extremely difficult to decide whether a new project is viable or not.
It’s also worth noting that because this additional tax relief has been put in place relatively quickly, it hasn’t yet been included in a finance bill and so companies won’t be able to claim the additional rate of relief until this is in place.
As experienced R&D accountants, we can provide you with cashflow projections and recommendations. Find out more about our R&D relief services via our website or get in touch with our friendly team of accountants today. Further support regarding R&D tax relief can be found via the government website.