Autumn Statement 2022: Changes To R&D Tax Relief
The Chancellor Jeremy Hunt has announced his financial plans for the UK economy in 2023 and beyond. The Chancellor’s 2022 Autumn Statement comes at a time of significant economic challenge for the UK and global economy – Putin’s war has caused a surge in energy prices, and post-pandemic debt has only deepened.
How will this affect R&D Budget?
Yet in his statement Hunt has said that it would be a “profound mistake” to cut the government’s research and development budget. He says funding will be protected, with an increase to £20bn by 2024-25. With new and modernized legislation (originally mentioned in the Spring Budget of 2021) becoming effective in April 2023 to better capture the shape and nature of UK innovation with software and big data, the Chancellor also expressed a desire to turn Britain into “the world’s next Silicon Valley”.
What R&D Rates are changing after the Autumn Budget?
The statement, though far from what many might were expecting to be all ‘doom and gloom’, is not without significant reform to the R&D tax-credit schemes, both SME and RDEC:
- for expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate for large companies claiming R&D relief will increase from 13% to 20%;
- the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%; and
- the SME credit rate will decrease from 14.5% to 10%.
These reformations continue a long-upheld series of improvements to the generousness of the government’s large-company RDEC scheme; the changes also appear to indicate the first step towards what Hunt has called ‘a simplified, single RDEC-like scheme for all’.
Which businesses will feel the effects?
Whilst we welcome the government’s efforts to increase compliance and continue to increase RDEC rates for large companies, these amendments are a somewhat predictable approach to cutting costs which penalises fast-growth start-ups while better rewarding the already-larger, typically more prosperous, businesses who claim RDEC. A significant amount of the tax-savings while be borne by R&D-intensive SMEs who are already struggling in the current economy.
Hunt’s most recent measures come as a quick-fix which is only likely to damage long-term growth. Innovative SMEs that are providing highly skilled jobs are the losers in the announcement. The real issue remains a lack of compliance measures to target abuse of the system. For a start, we at Kene Partners would like to see the Chancellor implement new measures for regulation of UK R&D advisers.
More measures to combat fraud and exploitation of the scheme while improving legislative clarity are required. And we can only hope that the government elucidates and elaborates on these points in April 2023.
What do these numbers mean in practice?
Some potential scenarios based on the Chancellor’s amended rates are described below:
- a SME with large profits can expect the rate of its relief to decrease from 25%-22% while an SME with small profits will receive a benefit rate of 16% instead of 25%;
- a loss-making SME receiving a cash-credit can expect its rate of relief to decrease from 33% to 19%;
- an SME claiming a cash-credit in a break-even profit position can expect to see its benefit rate decrease from 19% to 9%; and
- benefit rates for RDEC-claimant companies will increase by between 4%-5% depending on their profits and tax position.
The government will continue to consult on the development of a single, integrated R&D scheme which is both compliant, accessible, and offers value for money for both SMEs and large companies. It will be interesting to see what further changes are discussed in the coming months – as well as how the changes can support UK SMEs as well as big businesses.
RDEC and SME relief-rate changes, compliance improvements, and the first steps towards a monolithic, integrated, and UK-centric R&D scheme.