On the 17th November 2022, the Chancellor announced sweeping changes to all aspects of tax and spending, including some major changes to the R&D tax relief scheme. These changes are in addition to the previously announced changes that come into force in April 2023, and are designed to reduce fraud and non-compliance with the R&D tax relief guidelines, as well as forming the first step towards a ‘simplified, single RDEC-like scheme for all’.
In brief, the enhancement and tax credit rates for both the SME R&D tax relief and RDEC have been changed. From expenditure on after 1st April 2023, the enhancement rate for SME tax relief will be 86%, reduced from 130%, and the tax credit rate will be 10%, reduced from 14.5%. Conversely, the RDEC rate will increase to 20% from 13%.
These changes will reduce the tax benefit that a company receives from their SME R&D tax relief claim by up to 54%, and increase the amount available through RDEC by up to 54%. The calculations are further complicated, however, by the increase in Corporation tax that’s due to come in in April 2023 as well. These changes are summarised in the table below.
|
|
Loss-making SME |
Break-even SME |
Profitable SME: <£50k |
Profitable SME: >£250k |
RDEC claim: 19% tax |
RDEC claim: 25% tax |
|
Tax benefit as a % of eligible expenditure, pre-April 2023 |
33.35% |
18.85% |
24.7% |
24.7% |
10.53% |
– |
|
Tax benefit as a % of eligible expenditure, post-April 2023 |
18.6% |
8.6% |
16.34% |
21.5% |
16.2% |
15% |
|
% change in tax benefit |
-44% |
-54% |
-34% |
-13% |
+54% |
+42% |
No, these changes don’t affect how the tax benefit of a claim is calculated or realised. All you need to do is use the new enhancement and tax credit figures in your calculations.
The main knock-on effects come from the changes to the RDEC rate. Up until now, SMEs claiming grants have had to claim RDEC rather than SME R&D tax relief, which means that in some scenarios taking a grant could be detrimental to the overall financial health of the company. These changes will bring the tax benefit from RDEC into line with that from SME, meaning that there will no longer be a need to worry about R&D tax relief when considering whether an SME should pursue grant funding for their R&D.
It’s also good news for SMEs that undertake R&D on behalf of large companies—these companies will also benefit from the increase in the RDEC rate.
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