The chancellor announced a rebalancing of the rates for R&D tax relief in an effort to ensure that taxpayer support is as effective as possible - but small, loss-making businesses will be hit hard.
The changes announced in the Autumn Statement include a significant reduction in the generosity of the relief for SMEs, as part of a drive to improve compliance and reduce fraud and error.
The chancellor has reduced the enhancement rate for SMEs from 130% to 86% and the credit rate from 14.5% to 10%. A typical loss-making SME currently receives up to 33% payable credit on qualifying R&D expenditure. Following today’s announcement, from 1 April 2023, the generosity of this credit will be reduced by 44% to 19%.
This means that a business making an SME claim that includes £500,000 of qualifying expenditure would now benefit from a payable credit of £93,000, compared to the previous amount of £166,750.
These figures paint a potentially daunting picture for smaller innovative SMEs, with the likely consequence being a slowdown in their R&D investment which has the potential to affect growth and jobs – even in R&D intensive sectors.
The drop in generosity is starker for smaller businesses, including both loss makers and those with smaller profits, because of the impact of the previously announced rise in corporation tax to 25% for businesses with profits over £250,000. This means that the changes will be felt by smaller businesses, including highly innovative pre-revenue start-ups, which contradicts the chancellor’s suggestion that ‘those with more should contribute more’.
Finally, it is not clear how this measure specifically targets error and fraud, which the chancellor cites as the reason behind the changes.
Increased generosity to RDEC
The chancellor has announced that the R&D expenditure credit (RDEC) rate will increase from 13% to 20%. This is a 42% increase in generosity (after tax) from 10.5% to 15%. This likely will go some way to mitigate the impact of the forthcoming changes to relief for overseas R&D, softening the blow on multinational companies.
Previous research has shown that additionality for RDEC is greater, meaning it provides a greater return for taxpayer’s money. Increasing the generosity of RDEC should therefore translate to a significant increase in business investment in R&D, underpinning the government’s growth strategy for the UK.
This rebalancing represents a step towards a simplified, single RDEC-like scheme for all. This is something we have long advocated for, albeit not at a lower rate of generosity for R&D intensive SMEs. Not only would this move simplify the relief, RDEC offers greater certainty and visibility, providing clearer benefits to business decision-making.
Home >Articles > Autumn Statement 2022: R&D tax relief changes
Autumn Statement 2022: R&D tax relief changes
The chancellor announced a rebalancing of the rates for R&D tax relief in an effort to ensure that taxpayer support is as effective as possible - but small, loss-making businesses will be hit hard.
The changes announced in the Autumn Statement include a significant reduction in the generosity of the relief for SMEs, as part of a drive to improve compliance and reduce fraud and error.
The chancellor has reduced the enhancement rate for SMEs from 130% to 86% and the credit rate from 14.5% to 10%. A typical loss-making SME currently receives up to 33% payable credit on qualifying R&D expenditure. Following today’s announcement, from 1 April 2023, the generosity of this credit will be reduced by 44% to 19%.
This means that a business making an SME claim that includes £500,000 of qualifying expenditure would now benefit from a payable credit of £93,000, compared to the previous amount of £166,750.
These figures paint a potentially daunting picture for smaller innovative SMEs, with the likely consequence being a slowdown in their R&D investment which has the potential to affect growth and jobs – even in R&D intensive sectors.
The drop in generosity is starker for smaller businesses, including both loss makers and those with smaller profits, because of the impact of the previously announced rise in corporation tax to 25% for businesses with profits over £250,000. This means that the changes will be felt by smaller businesses, including highly innovative pre-revenue start-ups, which contradicts the chancellor’s suggestion that ‘those with more should contribute more’.
Finally, it is not clear how this measure specifically targets error and fraud, which the chancellor cites as the reason behind the changes.
Increased generosity to RDEC
The chancellor has announced that the R&D expenditure credit (RDEC) rate will increase from 13% to 20%. This is a 42% increase in generosity (after tax) from 10.5% to 15%. This likely will go some way to mitigate the impact of the forthcoming changes to relief for overseas R&D, softening the blow on multinational companies.
Previous research has shown that additionality for RDEC is greater, meaning it provides a greater return for taxpayer’s money. Increasing the generosity of RDEC should therefore translate to a significant increase in business investment in R&D, underpinning the government’s growth strategy for the UK.
This rebalancing represents a step towards a simplified, single RDEC-like scheme for all. This is something we have long advocated for, albeit not at a lower rate of generosity for R&D intensive SMEs. Not only would this move simplify the relief, RDEC offers greater certainty and visibility, providing clearer benefits to business decision-making.
