How will the Autumn Statement affect my R&D claim?
HMRC currently encourages innovation via two different R&D schemes, one for SMEs and a separate one for large companies. The SME scheme currently enhances R&D qualifying expenditure by 130%, so for every £100 spent, the company benefits from a deduction of £230 from their taxable profits. This deduction may either decrease their profit, switch their profit to a loss, or increase an already loss-making company’s loss.
Where R&D has taken the company into a loss or increased their loss, the company can choose to surrender the loss to HMRC in exchange for a payable tax credit at 14.5%. This tax credit is particularly common in start-ups and early-stage companies which have not yet made a profit and is a direct cash injection to the company.
The SME R&D scheme has been subject to misuse and abuse, with HMRC dramatically increasing the number of compliance notices issued over the past 12 months, which has been widely covered in by the media. Jeremy Hunt referenced the misuse of the SME scheme during his announcement on 17th November, as a precursor to the government’s changes.
What changes were announced to the R&D Schemes in the Autumn Statement?
From April 2023, the SME scheme additional deduction will reduce from 130% to 86% and the payable tax credit will decrease from 14.5% to 10%. The impact of these changes depends on whether your business is profit making, loss making or breaking even.
While the SME scheme is set to decrease from April 2023, the large company scheme, known as RDEC, where companies receive a taxable expenditure credit for qualifying R&D, is set to increase from 13% to 20%.
It could be perceived that these changes to both the SME and RDEC schemes are the early signs of reforming HMRC’s policy into a single scheme for small, medium, and large companies.
How these changes affect my claim?
SME Scheme – Although on the face of it, the SME scheme tax benefit has been reduced, with the reduction of percentages to the cash credit and enhanced expenditure, as the tax relief is based on Corporation Tax, some of the reduction to the scheme will be mitigated by the increase in Corporation Tax rate to 25% from April 2023.
We have calculated how SMEs will be affected from April 2023, taking into consideration the reduced enhancement to 86% and reduction in tax credit to 10%.
£100k expenditure example – SME Scheme
£25k expenditure example – SME Scheme
RDEC (large company scheme) – Businesses who fall into the criteria to claim under the RDEC scheme will see an increase to their tax benefit, with the taxable expenditure credit set to increase from 13% to 20%.
We have calculated how claims under the RDEC Scheme will be affected from April 2023, taking into consideration the credit increase to 20% and Corporation Tax increase to 25%.
£100k expenditure example – RDEC Scheme
£25k expenditure example – RDEC Scheme
Further “proposed” changes from April 2023.
As well as the changes announced within the Autumn Statement, several proposed changes were also put forward by HMRC on “legislation day” on 20th July 2022. These proposed changes are designed to expand the scope of qualifying expenditure, refocus the reliefs towards innovation in the UK and tackle abuse of the R&D scheme.
For more information about these proposed changes, read our “R&D Legislation Changes” news article.