SMEs can currently take advantage of two R&D tax relief programs. These will change starting from April 2023, and long-term plans call for redesigning and overhauling these.
Jeremy Hunt, Chancellor of the Exchequer made this declaration during the Autumn Statement: “I have decided today to cut the deduction rate for the SME scheme to 86% and credit rate to 10%, but increase the rate of the separate R&D Expenditure Credit from 13% to 20%. Despite raising revenue, the OBR has confirmed that these measures have no detrimental impact on the level of R&D investment in the economy. Ahead of the next budget, we will work with industry to understand what further support R&D intensive SMEs may require.”
To put it another way, SME repayable credit claimants will see a significant reduction in financing. However, it should be noted that the net benefit of R&D claims will drop less for profitable SME applicants.
Funding for RDEC claimants, both profitable and loss making, will rise overall. While this benefits big enterprises, it also benefits SME claimants who work on R&D projects with outside contractors and those who receive other types of grant money.
The good news is that cloud computing and dataset expenditures will be added to the list of R&D expenditure categories. This should improve R&D credits for the sector and is especially pertinent to companies in the TMT sectors where these charges might make up a sizable portion of their R&D efforts.
In addition, new Health and Social Care Levies will be included in the qualifying components for R&D staff costs (and payable credit caps), in the same way as national insurance contributions currently do. Finally, R&D in pure mathematics will now qualify for relief and can form part of the qualifying R&D activities of the claimant.
According to the BIA, the SME change is as follows:
“In practice, this means that, under the current proposals, businesses who have made their investment plans based on the SME R&D tax relief providing 33p for every £1 the company itself invests in R&D will instead receive 18.6p for each £1 of in-house R&D they perform and as little as 12p for each £1 of R&D they outsource to universities, hospitals or other companies.”
The bottom line is that the amount of the cash rebate received has been reduced by more than 40%. Although the SME regime will be less generous in the future, it is important to keep in mind that it will continue to offer an additional 86% of enhanced tax relief beginning on April 1, 2023, as well as a repayable tax credit worth up to 18.6p for every £1 of qualifying expenditure, making it still a valuable benefit.
It could be realistic to anticipate some increase in the level of qualifying expenditures to which the new rates will apply if this expenditure relates to qualifying R&D given these factors, together with the effects of inflation on labour costs, consumables, etc.
