Spring Budget 2023: Changes to R&D tax relief

While the headline rate of corporation tax will still increase, various allowances remain frozen for the time being, and adjustments to the primary R&D schemes are still proceeding in line with plans outlined in the Autumn Statement. Today’s announcement brought some significant and interesting changes in any case.

The Chancellor has:

• Created a new relief scheme for very R&D-intensive SME firms
• Delayed the implementation of overseas expenditure restrictions in R&D relief claims by one year (these will now begin in April 2024)

In this article, we take a look at the UK R&D funding landscape, as well as what we can see on the horizon after the 2023 Spring Statement.

How will this affect the R&D budget?

From the government’s perspective, and their overall Spring Statement, today’s announcements will equate to an extra £50 million of R&D expenditure in 2023/24. This will be followed by several hundred million pounds of extra R&D expenditure per year for the next four years.

What R&D rates are changing after the Spring Statement

With the changes set out in the 2022 Autumn Statement about to come into effect, we see modifications to both the SME scheme and RDEC effective from April 1^st_, as well as a new scheme.

The SME scheme is to become less generous – Due to the method in which the uplift is applied, this will have a bigger impact on loss-making companies than profitable ones. With an uplift of 86% (down from 130%) still available, it remains a valuable tax incentive for innovative SMEs.

RDEC scheme is to become more generous – The Research and Development Expenditure Credit, which is often used by larger firms (but is available to SMEs), is becoming more generous. The headline rate is jumping from 13% to 20%. This is applied differently to how the SME scheme works, but it will become approximately 50% more generous whether you are a profitable or loss-making business.

New tax relief for R&D intensive SMES – The Chancellor announced a brand new credit for loss-making SMEs whose qualifying R&D expenditure is 40% or more of their total expenditure. This will be payable at a rate of 14.5% of qualifying R&D expenditure.

In the published Budget document, the government also provided an update on the review of their proposal to merge RDEC and the SME scheme. Their consultation is now closed and they are considering the responses. They are keeping the option open to introduce a merged scheme from April 2024 and draft legislation will be published later in the year.

They also announced that they were delaying the restrictions to overseas expenditure in the R&D reliefs while they consider the interaction between overseas expenditure and the mechanics of any potential merged relief.

Which businesses will feel the effects?

We are pleased to see the Chancellor continuing his commitment to improving RDEC. The predominantly larger companies that use RDEC play a vital role in the UK economy and the updated rate is a significant boost. SMEs can benefit from this rate too in certain circumstances. The Chancellor has previously spoken of his vision for UK innovation, comparing the UK to ‘Silicone Valley’ – and the RDEC amendments will support the realisation of this vision. In general terms, any public money invested in innovation tends to generate returns through stronger, more competitive companies.

The previously announced reduction to the SME scheme’s rates is now tempered by the new intensive R&D credit available from April 1^st. Many SMEs will be claiming at a lower rate than in previous years.

It means that it is more important than ever to use a reputable R&D tax specialist to ensure your claim is accurate while maximising the tax credits available to you. Our team of R&D tax specialists consists of engineers, chartered tax advisers and science and technology PhDs. We have in-house expertise to capture the intricacies of your R&D claim and  ensure your claims are robust and that you always receive correct benefit.

What do these numbers mean in practice?

Delving into the detail, here are some examples of how the new rates from April 1^st could work:

• A loss-making SME that claims a cash credit will see its rate decreased from 33% to 19%.
• A breaking-even SME claiming a cash credit will see the rate decrease from 19% to 9%.
• An SME with small profits will see its relief decrease from 25% to 16%.
• An SME with significant profits will see its relief decrease from 25% to 22%.
• An SME claiming the new intensive R&D tax credit will receive a relief rate of 27%
• An SME or large company using RDEC will benefit from receiving a 20% credit rather than 13%.

If you are already claiming R&D tax credits and want to discuss what the forthcoming changes and the Chancellor’s announcements could mean for your future claims, please don’t hesitate to get in touch. If you are new to claiming R&D tax credits and want to get started with exploring your eligibility, complete our five-minute test.

FAQs

Any announcement from the chancellor prompts questions as people rush to understand how it will affect them. Here are our answers to several of the most common questions after today’s Spring Budget 2023.

Who qualifies for the new intensive R&D tax credit?

The new credit is available for loss-making SMEs (limited companies) who spend at least 40% of their total expenditure on qualifying R&D.

If my R&D covers time periods before and after April 1^st 2023, do I need to apportion the costs against the new and old rates accordingly?

R&D costs are often claimed for when they occurred but there are some exceptions. One example is costs which cover a period of time like employee bonuses. These would need to be apportioned on the accrual basis.

Are there any further changes planned for R&D tax credits?

As announced previously, the government is working towards a new merged RDEC and SME scheme which may be implemented in April 2024. Further news of this will be provided later in the year and nothing has been committed to yet. We will keep you updated.

Did the chancellor announce any other support for innovative businesses?

Yes, there was significant support announced for creative industries such as film, TV and gaming as well as specific technologies. In particular, there were large funding announcements for AI and quantum computing.