Changes to the R&D tax regime this April: cliff edge or soft landing?

Significant changes to the tax credit regime take effect on 1 April 2023. SMEs will be worse off but larger companies will benefit. Accordingto the government, the new rates will maintain the UK’s position as a competitive location for R&D and ensure public money is spent effectively.

According to an Office for Budget Responsibility assessment the changes will not have a negative effect on levels of R&D investment in the UK.

Since the schemes began £47.6 billion have been claimed and there have been more than 500,000 claims.

The changes are partly in response to significant levels of fraud and error in claims, especially in the SME sector. HMRC has said it is committing £200 million over the next four years to try to eradicate fraud.

‍

SME Scheme

Currently SMEs can apply for R&D tax credits in respect of costs incurred on an R&D project initiated and carried out in the past two years. At present the scheme allows them to claim 130% of qualifying costsspent on the project against their corporation tax bill. From 1 April this will drop to 86%.

Furthermore the tax credit rate will be cut to 10% from 14.5%.

It is worth noting that the main rate of corporation tax will rise to 25% from 19% in April. However, businesses that make profits of £50,000 or less will remain on the 19% rate.

SME Loss Making Business

‍

The maximum reduction could be up to 54% of the tax creditfor companies surrendering a loss. For profitable companies the reduction in tax credit will be about 17%.

 SME Profit Making Business

‍

R‍DEC - Large companies

The tax credit rate will increase to 20% from 13%. The tablebelow is based on the incoming corporation tax rate of 25%

Responses

Some companies and sectors are opposed to the changes. The UK Bioindustry Association, for one, raised concerns that companies would not receive the support they had been expecting, leading to reductions in R&D activity. It calculated that SMEs that would have received tax relief of 33p in the pound will from April receive 18.6p in the pound and as little as 12p for R&D activities they outsource to others.

 While the tax credit changes are intended to reduce fraud, HMRC has provided few details about how it will set about this. Of course, simply cutting allowances will not in itself do much to reduce fraudulent activity.

 It is expected that at some point the SME and RDEC regimes will be amalgamated; however, the Treasury has not published any proposals relating to this.