After much adverse publicity in recent days and weeks around exaggerated and fraudulent R&D claims, particularly in relation to claims under the Small & Medium Enterprises (SME) scheme, the Chancellor has reacted by reducing the tax benefits potentially available through an R&D SME claim.
Currently qualifying R&D expenditure is enhanced for corporation tax purposes by 130%, so a claim of £100,000 would obtain a £130,000 tax deduction, potentially saving the company £24,700 in tax (£32,500 from 1 April 2023). The changes announced today reduce the additional deduction rate from 130% to 86% for expenditure incurred on or after 1 April 2023. This reduces the tax saving on £100,000 of qualifying R&D spend to £16,340 (£21,500 from 1 April 2023).
Whilst this suggests quite a significant reduction in tax benefit, it should be remembered that the previously announced corporation tax increase to 25% from 1 April 2023 softens the blow. On a year-by-year comparison, the current saving to an SME on £100,000 of qualifying R&D spend is (£130k x 19%) £24,700 whereas the future saving will be (£86k x 25%) £21,500, a loss of relief of £3,200 on qualifying spend of £100,000.
Where an SME is loss-making, they can surrender the loss arising from qualifying R&D expenditure for a repayable R&D tax credit. The SME credit rate is currently 14.5% and this will reduce to 10% on 1 April 2023.
Whilst this is a clear attempt to reduce the benefit of spurious claims made by “boutique” R&D firms under the SME scheme, conversely, the Chancellor has made the Research and Development Expenditure Credit (RDEC) scheme more attractive, and the rate of relief will increase from 13% to 20%, again from 1 April 2023. For the most part, the RDEC scheme is designed for larger businesses and is considered less susceptible to abuse. The RDEC scheme incentivises increased employee headcount as the qualifying costs are restricted to payroll expenses.
These changes are potentially a step towards a simplified single RDEC-like scheme for all, with the Government to consult on the design of a single scheme.