The Chancellor has announced a number of changes to rebalance research and development (R&D) tax reliefs, including reducing the benefits available under the small and medium sized enterprise (SME) regime and increasing the benefit available under the large company or R&D Expenditure Credit (RDEC) regime. These changes coincide with the increase to the corporation tax rate to 25 percent from 1 April 2023. The Government has also announced its intention to open a consultation on the design of a simplified, single RDEC-like scheme for all businesses.
SME regime changes
Currently, an SME obtains additional tax relief equal to 130 percent of the R&D expenditure. From 1 April 2023 this will decrease to 86 percent. For a tax paying company, when taking into account the new 25 percent rate of corporation tax, this will reduce the effective incremental cash benefit from 24.7 to 21.5 percent.
In addition, loss making companies can surrender losses for a cash R&D tax credit (RDTC). The RDTC rate was 14.5 percent and this is being reduced to 10 percent from 1 April 2023. So, a company spending £100,000 on R&D could potentially surrender £230,000 for a 14.5 percent RDTC of £33,350 under the existing rules. This will reduce significantly to £18,600 under the new rules (£100,000 x 186% x 10%).
RDEC regime changes
The RDEC works differently to the SME scheme. Instead of obtaining additional tax relief, the company obtains a credit (akin to a grant) which is itself taxable. The RDEC rate is increasing from 13 to 20 percent. This results in a significant increase to the post-tax cash benefit from 10.53 to 15 percent with effect from 1 April 2023.
What is the thinking behind these changes?
It appears with these new measures the Chancellor is seeking to make the UK RDEC regime more internationally competitive whilst controlling the overall costs of the R&D tax incentives. There are also concerns that the SME regime has been subject to abuse and error so the reduction in the benefits under the scheme is a blunt means to control the costs.
It should also be noted that these announcements are in addition to previously announced measures including the refocusing of the R&D incentives on UK based activities, inclusion of cloud and data costs and the additional compliance requirements to prevent abuse of the schemes and to provide HMRC with better data to ensure the integrity of claims.
Looking forward, the Government has stated its intention to move towards a single simplified RDEC regime and to look at providing additional incentives to R&D intensive SME companies. Therefore, further changes to the R&D incentives are expected in the near future.
KPMG in the UK’s view
The increase to the RDEC regime should be welcomed as it makes the regime more competitive and goes some way to offsetting the costs of the additional corporation tax and exclusion of overseas R&D with effect from next April. The changes to the SME regime are understandable from the lens of wishing to control costs and make the scheme less attractive to those making excessive or invalid claims. However, the changes fall on all SMEs and the sharp end of the cost reduction will fall on loss making technology companies that are most in need of funding in the early phases of the technology development.
We would welcome steps to make the R&D incentives better targeted and to improve the compliance of the regimes by increasing resource dedicated to making enquiries and to strengthen processes for identifying and tackling errors and fraudulent claims.
R&D claimants should take a deep breath having had a number of changes announced and consider the implications for future claims and future funding of innovation. There are also grants and Patent box incentives that can help generate cash funding for innovative activities and help close any funding gaps.
For further information, you may reach out to Carol Johnson or Patrick Fletcher.