In 2022 UK Government Research and Development (R&D) tax credit and relief schemes were constantly in the news over concerns about fraud within the SME scheme and HMRC announcing a raft of changes, which it says are aimed at tackling the fraud.
Here is a summary of the changes planned to be implemented for R&D expenditure from 1st April 2023 (all subject to legislation being included in the UK Finance Bill 2023).
SME claims rates will reduce while RDEC claim rates increase
In the 2022 Autumn Statement the Conservatives announced cuts to the level of support for Small and Medium Enterprise (SME) R&D claims. The hardest hit will be loss making SMEs claiming R&D Tax Credits as their rate of benefit fell from a range of about 19%-33% of their R&D costs to around 9%-19% of R&D costs. So this means an SME currently benefiting from receiving 33p per £1 of R&D expenditure as a payable tax credit, will now only receive just under 19p per £1. The value of an R&D claim is partly determined by a company's taxable profit or trading loss in the year of the R&D claim.
SME claim rate changes
The value of an SME R&D claim is partly determined by a company's taxable profit or trading loss in the year of the R&D claim.
- Both the enhancement rate and the payable tax credit rate (payable against a loss) will reduce, from 130% to 86% and 14.5% to 10% respectively.
- This means the range of possible claim values change from currently circa 19% to 33%, to circa 9% to 22% of qualifying R&D costs.
- Profitable companies in the 25% Corporation Tax (CT) bracket stand to get the best level of benefit.
- Companies ending their year at breakeven or making a loss will see the biggest reduction in their level of benefit.
- The current SME scheme gives loss making companies a generous cash pay-out. From April 2023, the choice is a pay-out at 10% loss surrender rate, versus a future profit offset at the 19% to 25% CT rate.
RDEC claim rate change
Companies with over 500 employees claim under RDEC (Research and Development Expenditure Credit) and in contrast with the reduction to the SME R and D tax credit/relief scheme the RDEC scheme, above the line credit, was increased from 13% to 20% of qualifying R and D costs.
Other changes to the SME scheme
- The cost of using foreign based sub-contractors or workers will no longer be claimable except in very specific circumstances.
- An extension of qualifying expenditure to include the costs of data licenses and cloud computing.
- The inclusion of pure mathematics as a qualifying activity, it was previously specifically excluded.
- Claims will need to be filed digitally and include provision of a R&D cost breakdown and a brief description of the R&D.
- All claims will have to be endorsed by a senior officer in the claimant company.
More changes to come?
HMRC is still not done as there is a consultation underway - "R&D Tax Reliefs Review: Consultation on a single scheme".
There are aspects of the two schemes:
- the existing research and development expenditure credit (RDEC) for large companies (over 500 employees); and
- the small and medium enterprise (SME) R&D relief
that are very different so the implications of bringing them together could be dire or not, depending on which aspects of each scheme are adopted, and/or changed.
Read the HMRC consultation document here
Linda Eziquiel is an author for accountingcpd. To see her courses, click here.
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