What the spring '23 Statement means for R&D Tax Relief

How do these changes impact your business?

A classic March here at Easy R&D. My team are busy supporting a significant number of our customers to complete their R&D claims before the end of the tax year. And as we assess and check these claims, I’m always reminded how inspiring and diverse our Easy R&D customer base is. Our customers range from hauliers using advanced cloud technology and connectivity to enhance driver wellbeing and fleet performance, to cutting-edge farmers using their live data streams and high-end analytics to create a new low-carbon, sustainable future for British food production. And as the pressure mounts to hit the submission deadlines, it always a boost when our team can see that we are helping to make a positive impact to some of the most talented, growth-centric and innovation-focused businesses in our economy.

As ever, I am optimistic. There are still signals that inflation will drop in the mid-term, despite the February inflation coming in higher than aggregated economic forecasts. Business and consumer confidence may reset in the latter half of the year. But not all is perfect…

Back in November 2022, our expert tax team updated you on Jeremy Hunt’s first Budget Statement as Chancellor and the impact on R&D tax relief and the RDEC scheme. We recommended that all companies making R&D claims or planning for future claims should not be put off from claiming – the R&D tax relief scheme will still be financially beneficial - but decision makers did need to be aware of the implications of the planned changes.

In a nutshell, the November 2022 announcement told us that the Government was planning on reducing the percentage of the SME tax relief from April 2023 – these make up the large majority of R&D claims each year - while increasing the value of the RDEC scheme for larger businesses. They also extended the scheme to include cloud computing, mathematics and advanced data projects. An important and long overdue change. Even so, in my view this announcement was a net step backwards in terms of the vital Government support for the SMEs that fuel and drive innovation, employment and wealth creation in every sector of our economy. I fear that some of these changes are in part driven by a desire to cut down on a minority of spurious claims, and less from a well-considered review of the real impact of R&D tax relief on SME business confidence and innovation investment.

In November, our team assessed a range of scenarios that showed how a typical company might still benefit from R&D tax relief, albeit at the new lower rates. We also reminded you that the measures will only make an impact on the claims submitted from April 2024 at the earliest, as the new relief rates applied to financial years that started after April 2023. Our advice in November was there was no need for a knee-jerk reaction.

The other key thing that we underlined in November was that in parallel with decreasing the percentage of SME tax relief, Jeremy Hunt intended to increase the Corporation Tax rate from April 2023, following a plan originally set by Rishi Sunak in 2021. To some extent this increase offsets some of the negative impacts of the lower percentage relief. A key thing to remember is that this rate increase was only for the more profitable businesses making over £250,000, that will pay the higher 25% Corporation Tax, with only businesses with profit under £50,000 paying the current 19% rate.

Since November, business organisations including the CBI, IoD and FSB, in my opinion quite rightly, lobbied strongly for Jeremy Hunt to soften or reverse the change in SME R&D tax relief. They argued that this relief is a critical driver of investment, innovation and risk taking – just what the economy needs if we are to tackle our dire and chronic productivity and growth rates and post-pandemic torpor. We added your and our voice to this debate, contributing to the recent consultation on R&D tax, that we hoped would reshape the policies that Jeremy Hunt was pursuing.

We have now had a fuller Spring Budget statement and gained more clarity on the changes to R&D tax incentives that are coming for the next tax year. There was no reversal, just clarification, and to be fair, some limited but positive changes in the R&D schemes that are focused on science and technology-oriented businesses. Frankly, this was disappointing. I believe that we now lack the clarity and support levels that are needed to encourage the majority of UK businesses to invest effectively, risk-take and enhance their business performance through revenue expenditure or capital expenditure. Seems like a miss from the Treasury, as we try to create a world-class innovation-driven economy.

Let’s look at the details

The key changes that will come into effect from April 2023, that are most relevant to our customers:

For SMEs, the enhancement rates and the surrender rates (for loss-making businesses) are both decreased to 10%. This applies unless you run a loss-making company with 40% or more of your expenditure committed to qualifying R&D activities, in which case the current 14.5% rate still applies. These new parameters rule out most UK businesses, SMEs, who will still benefit but at significantly lower percentage rates.
There was good news. A plan to disallow relief on overseas R&D activities has been delayed for a year, allowing more time for consultation and assessment of the impact on innovation investment by businesses that use offshore technology sub-contractors to support their innovation programmes.
Jeremy Hunt confirmed an increase in Corporation Tax with a sliding scale between 19% to 25% for companies with profits between £50,000 - £250,000, at which point the full 25% rate kicks in. Businesses with profit below £50,000 will retain the 19% rate.
Capital investment was targeted with a new policy on capital allowances, allowing businesses to claim accelerated relief for capital expenditure. A positive in terms of cashflow and freeing up capital for business innovation, however, there was no announcement on any additional or specific incentives for R&D-related capital investment.
The RDEC rate, primarily for larger businesses, has increased from 13% to 20%. Seems like good news, but there is a slight sting in the tail. RDEC is treated as company income and so attracts Corporation Tax. The result: increased Corporation Tax rates will knock back the net value of the new RDEC relief to a net benefit between 15% - 16.25% depending on the overall profitability of the company. Even so, this is still a meaningful and welcome increase from the previous net benefit of 10.5%, which may encourage directors to either invest in more innovation or return better dividends to shareholders.

Well, the government’s consultation on merging SME tax relief with the RDEC scheme has now closed. They may well implement this merged scheme from April 2024, and we will keep you informed of news on this. A merged relief scheme will clearly have very considerable impacts on how we claim and the level of relief that can be generated. We remain in a fairly volatile R&D tax relief environment. Government policy is less than consistent with uncertainty the result. HMRC compliance checks seem to be accelerating in what appears a more blunderbuss rather than targeted way. The overall picture is not as motivating for SMEs who plan on innovation and R&D investment as it could be.

With all this, I’ll finish as I started: positively. British SMEs and leaders, who we meet every day, remain resilient, innovative, and smart. They’re an inspiration to work alongside. We’re looking forward to a well-earned Easter rest with our families, before we start the next round of claim support and investment in what could be an improving economic landscape.

If you have any questions on what the new changes to R&D relief may mean for you, please do get in touch with me or your Easy R&D contact. We love to hear from you and we’re here to guide and help.

Darren Wilmot