R&D tax relief can be claimed for work that is part of a specific project to make an advance in science or technology. It cannot be an advance within a social science, like economics, however, with effect from April 2023, R&D in pure mathematics will qualify for relief. Your project may research or develop a new process, product or service or improve on an existing one. To find out full details of what qualifies read the Government website.
During the Chancellor’s Autumn Statement last week, he made significant changes to the scheme citing abuse and fraud in the SME scheme. As a result, he has announced a cut in the enhancement rate to 86% (from 130%) and the tax credit rate to 10% (from 14.5%). For the RDEC (Research and Development Expenditure Credit) scheme, the rate will increase from 13% to 20%.
In addition, restrictions will apply on the costs of EPWs (Externally Provided Workers) that can qualify for R&D tax relief. The costs of EPWs will only qualify for tax relief where the EPWs are taxed through PAYE.
In addition to the above, R&D tax relief could be restricted to activities which are only undertaken in the UK.
He commented “Despite raising revenue, the OBR have confirmed that these measures have no detrimental impact on the level of R&D investment in the economy. Ahead of the next Budget, we will work with industry to understand what further support R&D intensive SMEs may require.”
But what does this mean for our clients and their businesses. There are a number of good points;
- Firstly, Government reaffirms its commitment to R&D and acknowledges a wider need to change how it funds innovation.
- The R&D tax will be simplified in the longer term and is likely to move on from SME and have a single scheme similar to RDEC.
- This would provide the foundations to better target the relief to certain sectors and projects and avoid the scheme being abused.
- For larger businesses, or some smaller businesses which do not qualify under the SME scheme, it is good to see the RDEC rate up to 20%.
However, as always there is also some bad news;
- The SME scheme has effectively had a cut of a third through the reduction to the enhanced rate moving from 130% to 86% and the tax credit reduction to 10% (from 14.5%). This means those companies who do qualify will get less cash back.
- This is a blanket cut and businesses who legitimately claim and rely on it will find this a brutal attack.
- The changes seem to impact SME’s the most and seems to be heading toward larger and London-centred businesses.
- This shift in strategy could damage the government’s levelling up agenda.
If you are already claiming relief, there is time to plan and make contingencies for the changes as these do not come into effect until April 2023.
If you are an SME and are currently claiming a tax credit the reduction could be up to 54%. However, if you are profitable the reduction should be circa 17%.
To find out how these changes will impact you please contact us and our team will help you plan for the changes and the impact on your business.