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Business Services  •  Business Tax  •  Corporate Taxation

Over 50% of SMEs say R&D tax credits reform will disadvantage them

By RJP LLP on 11 May 2023

The Treasury recently undertook a consultation on its proposals to review R&D tax credits and intends to merge the current RDEC (large company) and SME schemes. This is scheduled to take effect from April 2024.

New research published by Accountancy Age highlights that the majority of SMEs do not agree with the government’s intended revisions to the existing Research & Development (R&D) tax credit scheme and believe it will be detrimental to them. As announced in recent Budgets, a significant shake up of the R&D tax credits scheme is already underway.

The latest survey was conducted across 42,000 SME companies. It found that 51.3% believed the Treasury’s proposals to merge the two schemes were a negative change and only 12.8% were in favour of them. Although small company owners appreciated that merging the schemes will simplify the process, the long term value of the R&D tax credits scheme will reduce and in some cases, will mean it is not viable for them to continue to invest in ‘research and innovation’ activities.

How are R&D tax credits calculated?

Currently, SME companies who use the R&D tax scheme can claim an additional deduction against their profits of 130% of qualifying R&D costs or a tax credit of 14.5% where there are no available profits to offset.  From April 2023 these have reduced to an offset of an additional 86% or a tax credit of 10%.

An “enhanced” relief has been introduced for companies having qualifying R&D costs of at least 40% of total expenditure; these companies can continue to claim the 14.5% tax credit rather than the reduced 10% tax credit.

Expenditure that qualifies for inclusion in an R&D tax credits claim includes the following:

  • Employee costs – for staff who are directly or indirectly involved in R&D;
  • Agency staff – costs are weighted for those directly or indirectly involved in R&D;
  • Utilities - fuel, power, or water;
  • Materials and consumables - items used in the R&D project;
  • Software - used by the R&D team;
  • Subcontracted R&D expenditure (restricted to 65% of the cost);

Note that with effect from April 2024, relief cannot be claimed for R&D project work that is undertaken outside the UK.

RJP has helped hundreds of companies to secure R&D tax relief, and we could support your claim. If you would like advice, please email partners@rjp.co.uk.

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