How will the cuts to R&D tax credits affect your bottom line?

It is fair to say that Jeremy Hunt the current Chancellor has one of the UK’s toughest jobs. It is now well accepted that the government has a £60 billion ‘black hole’ to fill, half of which was already in existence due to the Covid pandemic and Brexit. The other half appeared almost overnight, after the disastrous Mini Budget and the effect of ‘Trussonomics’ on financial markets. As we highlighted in our Autumn Statement coverage, one of the cuts announced on 17 November was to the SME R&D tax credits scheme. According to the official Autumn Statement projections, the Treasury expects this will create an overall annual saving of £215 million in 2023-24 when it is introduced, increasing every year to £1.34 billion for 2027-28.

R&D tax credits become less generous for SMEs

A reduction in the generosity of business tax relief was always going to be an obvious target, especially for the R&D tax credits/tax relief scheme. It was already attracting criticism because of suspected fraud and general abuse of the initiative. So much so, that many other reforms are under way and the rules have slowly been tightened up. Now, the actual rates of the tax relief and tax credit on offer have also been restricted. It is a shame, given that when economic conditions are challenging, one of the best ways businesses can continue to future proof their organisations is through continued innovation and investment. The R&D tax scheme is a key part of this equation.

The latest reforms being proposed to the R&D tax reliefs and credits scheme will become effective from April 2023. The changes for SMEs are twofold:

1. R&D costs which can be claimed are reduced to 186% of qualifying expenditure, rather than 230% as currently; and
2. The available cash credit rate, which is for R&D tax losses that are offset against a cash rebate, are reduced to 10% from 14.5%.

These rate changes represent quite a big reduction in the tax benefit that can be obtained from SME  R&D tax relief.

How much will the drop to R&D tax credits relief cost a company?

The following example highlights the financial impact of the changes announced in the Autumn Statement 2022.

Until April 2023, a SME company with tax losses can reclaim a tax credit for an enhanced R&D tax loss, comprising 100% ‘normal’ R&D expenditure and the 130% enhancement, making a total of 230%. This can be exchanged for a 14.5% cash credit (subject to a ceiling relating to the amount of PAYE paid by the company). In monetary terms, every £100 spent on qualifying R&D activity can currently be converted into a cash credit of £33.35.

After April 2023, the enhancement rate drops from 130% to 86% and the payable credit rate from 14.5% to 10%. Instead of getting a cash credit of £33.35 the amount available is £18.60. It is a very significant reduction, but still represents value if a company undertakes R&D activities to remain competitive.

Large company scheme RDEC becomes more generous

At the same time, the R&D relief available to large companies is being increased. This relief is termed RDEC (R&D expenditure credits) and is available to larger companies and SMEs that do not qualify for the original SME scheme. Whilst it is much less generous than the relief available to qualifying SMEs, it is nevertheless being increased – this relief applies so that a 13% tax credit for eligible R&D expenditure can be offset against the company’s corporation tax liability. The credit itself attracts corporation tax, so once this is factored into the calculations, the net reduction to the corporation tax liability is 10.53% of the R&D expenditure. In the Autumn Statement, it was announced that this rate will increase; from 1 April 2023, the RDEC credit will increase to 20%. This is the rate after corporation tax is deducted at the new 25% rate, which also becomes effective on 1 April 2023. Overall, it represents a net ‘cash’ tax saving of 15% of total R&D expenditure; an increase of 4.47%.

Recent data suggests that fewer companies are claiming R&D tax credits now; interest in the SME scheme seems to have reduced since new measures were introduced by Rishi Sunak in his last Budget, held in spring 2022, which restricted the types of expenditure for which relief could be claimed under the SME scheme. Now these reduced SME rates might further deter SMEs from submitting applications.

RJP has many years of experience helping companies to successfully claim R&D tax credits and we would encourage you to submit applications sooner rather than later. From  April 2023, the relief will still offer value and we will be continuing to support clients with applications.

Contact us via partners@rjp.co.uk for more information.