Changes to R&D tax relief schemes
In the Chancellor’s Spring 2023 Budget ,Jeremy Hunt confirmed changes to the two Research and Development (R&D) schemes currently in operation. The main changes relate to the changes to the rates of relief available.
These changes came into effect from 1 April 2023 and are being brought in to help tackle a significant amount of fraud being perpetrated through the R&D schemes, particularly the scheme for SME’s.
What is R&D relief?
So what is R&D relief? This is a tax relief available in the UK for business which invest in qualifying R&D activities. The scheme is designed to encourage investment in R&D and help ensure UK businesses are at the forefront of global technological advancements.
There are two scheme currently available:
- SME R&D tax relief scheme
- R&D Expenditure Credit (RDEC) scheme
Both schemes work in a similar way in that you claim for enhanced tax relief on qualifying expenditure, directly relating to projects which seek to advance scientific or technological understanding in the respective field.
The advancement could be something completely new or it might be using existing technology in a completely new way. Companies can claim for projects seeking an advancement even if it ended up not working out, as it still advances understanding in what does not work.
R & D Expenditure Credit scheme (RDEC)
The RDEC scheme is available to all companies and allows companies to claim a tax credit of 13% of the qualifying expenditure incurred up to 31 March 2023. From 1 April 2023 this rate will increase to 20%.
This credit is then available to relieve corporation tax liabilities. If there is unused credit left after clearing the current year corporation tax, there is a calculation to perform to see how much of this can then be used to relieve corporation tax liabilities from other accounting periods for the company or other companies in the group. Any remaining balance can then be used to discharge any other tax liabilities such as VAT.
Currently SME’s would only use this scheme in certain circumstances, for example where the SME is subcontracted to undertake the R&D work by a larger company or where other government grants have been received for the project.
SME R&D relief
The SME scheme allows qualifying companies to claim tax relief at 230% on qualifying expenditure up until 31 March 2023, after which time the rate will reduce to 186%.
This will normally be largely made up of staff costs, including employers’ national insurance and pension contributions. Claims often also include material costs, an element of subcontracted fees, software and power costs.
The drop in the enhanced relief will be slightly mitigated by the increase in the corporation tax rates, for companies with profits over £50,000, which is increasing from 19% to 25% from the 1 April 2023.
Let’s compare the changes using an example:
A claim of £100,000 in qualifying expenditure incurred before 1 April 2023, will generate an additional corporation tax reduction of £24,700. However, claims of the same value for expenditure incurred after 1 April 2023 will only result in a corporation tax reduction of £21,500 – a drop of £3,200!
Who qualifies for SME R&D relief
You can make an R&D claim if your company:
- Employs less than 500 staff; and
- Turnover is less than €100 million; or
- Balance sheet total of under €86 million
If the company is part of a group or corporate shareholders with more than 25% an element of their staff, turnover and balances will need to be included in the calculations for these thresholds.
How does the SME R&D Credit work?
If the SME R&D relief claim creates a tax loss, the company can opt to surrender the loss for a credit of 14.5%, for claims relating to expenditure made up to 31 March 2023. For expenditure made after 1 April 2023, this rate will drop to just 10%! Once the loss is surrendered it will not be available to carry forward against future profits.
Based on our previous example of £100,000 of qualifying expenditure, claims before 1 April 2023 would generate a tax credit payment of potentially £33,350 (this includes the original 100%, not just the enhanced amount). For periods after 1 April 2023, for the same qualifying expenditure, would generate a tax credit payment of potentially £18,600 – a whopping drop of £14,750!
There is a cap on how much credit a company can claim under this scheme which is £20,000 plus three times the total PAYE and NIC liability of the company for the year. This cap has been in place for a little while now and as, in most cases, the majority of the claim is made up of employee costs, in most cases this tends not to be a problem.
To ensure you use the relief most effectively, before claiming the R&D credit, you should consider using the loss against any taxable profits either in the previous year or against expected profits in future years.
Is it still worth it?
For companies claiming under the SME relief scheme, these changes are going to have a negative impact, particularly for companies claiming the SME tax credit. However, there are still reasonable returns for making a claim so companies should still look at these schemes.
Before making a claim, companies should weigh up the costs or time associated with putting the claim together, against the expected return to ensure it is worthwhile.
For companies claiming under the RDEC scheme, claim for £100,000 qualifying expenditure will generate a credit of £13,000 for expenditure incurred before 31 March 2023. For expenditure incurred after 1 April 2023, the credit will be £20,000 – an increase of £7,000!
Understanding the difference between the two schemes and which one to use is important. Please contact our expert Ian Meaburn at email@example.com who will be happy to help.