Autumn Budget: Significant changes to R&D tax credit relief announced

It has been an unsettling time for businesses of late, with guidance and policies introduced and retracted in quick measure due to changes in Prime Ministers and Cabinet. Chancellor Jeremy Hunt’s Autumn Budget was much anticipated in the hope it would tackle the ever increasing level of inflation and cost of living crisis that is sweeping across the UK.

It was no secret that higher taxes and public spending cuts would be the Chancellor’s vehicle to reduce inflation, putting extra pressure on both businesses and families, at an already difficult time,  in order to achieve a long term gain.

Significant changes were introduced to R&D tax credit relief; changes that took many businesses and advisors by surprise due to the size of the reduction that was made to SME relief’s generosity and the speed at which the change comes into play.

Changes to R&D tax credit SME relief

Changes announced to SME relief include:

  • A reduction of the enhancement rate for SMEs from 130% to 86%
  • A reduction in credit rate for SMEs from 14.5% to 10%

So what does this mean in practise? 

At present, a typical loss-making SME will receive a payable tax credit of up to 33% on qualifying R&D expenditure. From 1 April 2023,  the generosity of this credit will be reduced by 44% to 19%. Profit making companies will also see a reduction in the credit, however, the impact on the business will not be as severe.

Changes to Research and Development Expenditure Credit (RDEC)

In contrast to changes to SME relief, the generosity of the RDEC scheme will increase. For expenditure on or after 1 April 2023, the the RDEC rate is set to increase from 13% to 20%.

So what does this mean in practise? 

The RDEC rate increase from 13% to 20% is equal to a 42% increase in generosity (after tax) from 10.5% to 15%. There are several factors to consider when understanding if your business can access RDEC relief, these include

  • Number of employees
  • Turnover
  • Amount of gross assets
  • Receiving grants

Matthew Jones, Managing Director at LimestoneGrey commented:

Matthew Jones, managing director, LimestoneGrey, chartered R&D tax credit consultancy

Matthew Jones

Managing Director

The Government’s attempts to tackle abuse in the industry has resulted in numerous legislative changes over the past few years. Each of these piecemeal changes has had an impact on legitimate businesses, with the latest change to SME relief being the largest for some time.

The speed at which this latest change will come into play, in my opinion, does not grant companies the time they deserve to plan, as I am sure many companies will have their research and development plans already set for 2023 and receiving R&D tax credit relief may feature highly in those plans.

In contrast, the increased generosity of the Research and Development Expenditure Credit (RDEC) is welcomed, with forecasts showing that this change will increase business R&D investment. However, it does raise a few concerns:

  • the RDEC changes will predominantly affect large companies, but with SMEs and start ups being the backbone of the economy, is this generosity misplaced?
  • The majority of large companies reside in city centres, particularly London and the South East, which opens the question about investment in the south verses the north at a time when the levelling up agenda is at front of mind.

The narrowing of the gap between SME and RDEC suggests that a one model relief will soon be on the cards.

If your company is anxious about how you will be affected by the April 2023 changes, I would advise you to contact your R&D tax credit advisor.