HMRC has been heavily focused on more rigidly policing the R&D Tax Relief schemes in the last few months, and while there were some rule changes expected for April 2023, we were not expecting cuts to the rates of relief.
The SME (Small and Medium-sized Enterprise) Scheme has involved an additional deduction of 130% of qualifying spend from taxable profits for many years, but from April 2023 this additional deduction will be cut to 86%. Of course, the main rate of Corporation Tax is also increasing from 19% to 25% at the same time which in itself would ordinarily result in an increase in the value of the relief. However overall this is still a cut in effective relief – broadly speaking, the Corporation Tax saving arising from the additional deduction will decrease from 24.7% to 21.5% of qualifying spend.
The payable tax credit rate will also reduce from 14.5% to 10% from April 2023. This applies where a loss making company opts to surrender its R&D tax losses for a cash payment rather than carry them forward against future profits. The effect of this for these companies is to reduce the maximum tax credit of 33.3% of qualifying spend down to just 18.6%.
At the same time as both of these changes, the rate of relief for the R&D Expenditure Credit (RDEC) is being increased from 13% to 20%. This is the scheme that applies to much larger companies, but also to SME companies that are carrying out subcontracted or subsidised R&D. The RDEC itself is liable to Corporation Tax, so with the main CT rate increasing to 25%, this means the net RDEC (i.e. the cash benefit) will be 15% from April 2023 (increased from the current net RDEC of 10.53%).
The government has stated that this is a first move towards unifying the two R&D schemes into a single one, and it can be clearly seen that the rates are converging. We therefore expect further changes, probably from April 2024 in due course, to move the rates closer together, or possibly to abolish the SME scheme altogether from that point.
If you have any questions for our Tax experts as a result of the Autumn Statement, please contact us on 01242 776000 or firstname.lastname@example.org.