The key topics covered in this piece are:
The Chancellor spent six minutes talking about tax changes during his hour-long Autumn Statement on 17th November 2022. Even though the R&D scheme was only mentioned briefly, the changes will have a significant impact for claims relating to R&D taking place after 1 April 2023. However, please remember that any changes to the R&D tax relief scheme will need to be seen in context. In parallel to the R&D scheme changes, there will be increases in Corporation Tax rates for businesses making over £50,000 from April 2023, that will offset some but not all the changes in the R&D tax scheme relief rates.
First, we want to highlight a major change for the SME R&D Tax Relief scheme. Chancellor, Jeremy Hunt, announced the ‘enhanced deduction’ would be reduced from 130% to 86%. The actual cash-flow effect of this change depends on whether the company is profit- or loss-making and the rate of Corporation Tax that they will pay.
The good news R&D story in the Autumn Statement, was for companies which make claims under the Research & Development Expenditure Credit (RDEC) scheme. This usually applies to larger businesses.
Currently, RDEC relief is set at 13%, equating to a net benefit to the claimant of 10.5%, as the benefit is accounted for as income and therefore is taxable. This RDEC rate will increase to 20% from April 2023, meaning a net benefit of 15% for companies paying 25% Corporation Tax. Whilst this might seem generous, it is still less than the SME scheme, so most companies will still be likely to prefer the SME scheme, if they are eligible.i
What does this mean for my company?
The first thing to note is that these changes do not come into force until 1st April 2023. No immediate changes are needed and current claims, and claims that relate to financial years starting up to 1st April 2023, are not impacted.
Because the higher Corporation Tax rate will increase to 25% from 1 April 2023, with a sliding scale of Corporation Tax for businesses with profits above £50,000 and changing rules for profitable and unprofitable businesses making an R&D claim there are many different scenarios that may apply to your company.
Below, we have highlighted a set of examples which are designed to provide some clarity on how the scheme will work from April 2023 and the change from current claims.
As a reminder, these effects only take place from 1 April 2023, therefore these changes are unlikely to impact claims made submitted to HMRC from 31 March 2024, at the very earliest.
A company has profits of £765,000. It spends £165,500 on qualifying R&D and makes an R&D claim under the SME scheme.
|Qualifying R&D Spend||R&D Enhanced Deduction||Corporation Tax Saving|
Here, pre-April 2023 the company receives an enhanced deduction of 130% instead of the 86% post April 2023. However, because the pre-April 2023 corporation tax rate is 19%, the company gets a benefit of £40,879 (£215,150 x 19%), whereas the corporation tax rate will be 25% post April 2023 and therefore the company gets £35,475 of corporation tax relief, even though the enhanced R&D deduction is c£74,000 less.
A company has profits of £240,000. It spends £87,000 on qualifying R&D and makes an R&D claim under the SME scheme.
|Qualifying R&D Spend||R&D Enhanced Deduction||Corporation Tax Saving|
Like the example above, the enhanced R&D deduction post April 2023 is significantly lower. However, because of the way Corporation Tax will be calculated for companies with profits between £50,000 - £250,000, this company gets almost as much R&D relief as they would have done under the pre-April 23 regime.
In this example, the company has profits of £65,000 before their R&D claim, but they are an R&D intensive company and have spent £140,000 on R&D. They wish to receive the maximum cash-flow benefit immediately, and so have surrendered their qualifying R&D losses for a payable credit.
|Qualifying R&D Spend||R&D Enhanced Deduction||Corporation Tax Saving||Repayable Credit||Total R&D Benefit|
Here, the company saves more on their Corporation Tax bill by virtue of the remaining £15,000 (£65,000 profit minus the first £50,000 which will be taxed at 19%) of their profits being taxed at 26.5%, post-April 2023. However, after deducting their profits from their enhanced R&D deduction, they have a lower level of losses to surrender post- April 2023 and these will be surrendered at a lower rate of 10% rather than the current 14.5%. The result is that the total R&D claim the company will receive is more than £10,000 lower under the new criteria.
In this example, the company is investing significantly into their R&D processes and have losses. The company has a £135,000 loss before their R&D claim and they have spent £79,000 on qualifying R&D.
|Qualifying R&D Spend||R&D Enhanced Deduction||Payable Tax Credit|
Here, you can see the company receives substantially less for its surrendered loss in the way of a cash repayment from HMRC. The company can only surrender the total of its R&D losses, which are the qualifying R&D spend and enhanced deduction added together. In this example, pre-April 2023 the company will have £181,700 to surrender at a rate of 14.5%. Whereas post April-2023, the company will only have £146,940 to surrender at the lower rate of 10%.
Other changes coming in April 2023, for R&D tax schemes
In addition to the Autumn Statement, earlier in Spring 2022, there were other announcements related to R&D tax schemes by Rishi Sunak, then our Chancellor. These planned changes, will also come into effect from 1st April 2023, attempting to minimise error and fraud, while also modernising the R&D scheme.
Considerations and possible actions:
Jeremy Hunt has clearly indicated that the Government support and want to continue to incentivise the British private sector to drive greater innovation and economic productivity. He suggested that the total Government investment in R&D schemes should remain at a similar cash level to today and their publicly stated position is that they are not trying to reduce the overall cost of the programme.
However, there are still clear signs that there is an unacceptable level of criminal fraud and error in the current scheme – these represents a small minority of claims but a substantial amount of claim value. Sunak and Hunt have both supported measures that are designed to reduce incorrect or illegal claims. HMRC have put in place an increasingly robust, albeit rather untargeted, set of new compliance and review processes for R&D claims. Recently, the Chartered Institute of Taxation criticised the government’s “over-zealous” approach to what assessing qualifies as R&D tax relief, and we have evidence of a number of investigations that are opened by HMRC targeting entirely legitimate claimants.
In our view, it is likely that the planned cut in the rate of payable credit, will have a greater impact on early-stage companies who often are investing more heavily in their innovation and may be running at low or negative profit rates. These R&D-heavy companies will be less incentivised to take a risk and drive British innovation. The new steps for extra signatories on R&D tax claims and the current scattergun approach to compliance checks also seem to be further barriers to making a claim. We believe that the current heavy-handed HMRC compliance regime may be a step too far. It may not necessarily stop those committing fraud, nor will it deter inadvertent errors. So overall the changes being made are not a net benefit to industry and may trigger unintended consequences with entirely valid investment and R&D not being put through for a claim.
As a leading national tax advisory service, specialising in R&D tax relief, we welcome and support well-designed efforts to make the scheme more effective, with lower abuse or error rates. We look forward to the HMRC compliance checks becoming more sophisticated and data driven as they enhance their focus on real criminal intent and reducing significant errors in claims.
Looking further ahead, Jeremy Hunt’s Autumn Statement also suggested that a consultation will be established to determine the additional support SMEs may need to accelerate innovate and support UK economic growth. All the signs point towards a unified R&D scheme, collating the large and small company schemes. In this scenario, it could be possible to offer an increased rate of relief to SME companies while simplifying the system. We are carefully monitoring the Government’s next steps and their statements of intent; we will keep all our customers fully appraised of plans and the their possible impacts.
What action should our business take related to our R&D claims?
Firstly, please be aware that the planned changes to the R&D tax relief schemes (SME & RDEC), new eligibility criteria and the restructured Corporation Tax regime will become valid only after 1st April 2023. For most businesses this means that the claims related to the relevant annual accounts will not be finalised or submitted until 2024 at the earliest and 2025 at the latest.
Any R&D claims submitted to HMRC should continue to be supported by sufficient contemporaneous records. Better record keeping optimises the claim, reduces the time involved in collating a claim and minimises the chance of an HMRC investigation. You can read our recent article on best-practice for record keeping here.
Regarding the planned changes to the SME and RDEC schemes it is important to speak to your professional tax adviser. They can help you to better understand how these changes could impact your business. They will offer you options to optimise your claim, and will ensure that your business is fully compliant with the upcoming legislation.
Should you have any queries on these planned changes to R&D tax relief or any aspects of the current R&D schemes and your claims, please do get in touch with our Easy R&D expert team.
Eligibility for the SME R&D scheme.
To claim the business must be a Limited Liability Company, registered in the UK and subject to UK Corporation Tax. The company must have fewer than 500 staff, and either have a Turnover of less than €100 million, or Gross Assets under €86 million. Companies that do not fit these criteria may claim under the RDEC scheme.
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