The Chancellor has added more changes to the relief for small and medium (“SME”) sized companies.
The changes that were already scheduled to come in from 1 April 2023:
Recent changes to the R&D regime | FKGB Accounting
- The Research and Development Expenditure Credit (RDEC) for large companies would increase from 13% of qualifying expenditure to 20%;
- The enhanced deduction which SMEs could claim for qualifying R&D expenditure would reduce from 130% to 86%;
- The SME tax credit would reduce from 14.5% to 10% (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); and
- Restrictions would be introduced regarding the amount of overseas expenditure that could be included in R&D tax relief claims.
In terms of changes that were announced during the Budget:
- The restrictions on the amount of overseas expenditure that can be included in R&D tax relief claims will be delayed until 1 April 2024; and
- For SMEs who are heavily involved in R&D, the repayable tax credit will remain at 14.5% rather than the reduced 10%. For these purposes, a company that is heavily involved in R&D is defined as one where 40% 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 important to understand that:
- The repayable tax credit is only available to companies that have a losses
- Under the current rules (which end on 31 March 2023), companies spending £100 on R&D, can obtain a repayable tax credit of £33.35;
- Under the new rules, companies heavily involved in R&D spending that same £100 on R&D will only receive a repayable tax credit of £26.97 by virtue of the reduced enhanced deduction – a loss of £6.38 for every £100 spent on R&D;
- 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 those companies will be £14,75 worse off than under the current regime.
