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Numerous reforms to R&D tax reliefs and credits had already been proposed to come into effect from April 2023 before the Chancellor’s Autumn Statement, including measures aimed at tackling some abuses of the reliefs and also to modernise them. As an unexpected further measure in the Autumn Statement, however, changes to the rates of these tax reliefs were announced which had not previously been suggested. These rate changes are described as a ‘rebalancing of the generosity of the reliefs’, but for most companies claiming R&D reliefs this will result in a reduction in R&D tax savings (significantly so for small and medium-sized companies (SMEs) reporting tax losses), as the rebalancing involves a reduction in the benefits of the scheme applicable to SMEs.
Currently, an SME company can claim additional tax relief at 130% of qualifying R&D expenditure, which at a 19% corporation tax rate means a reduction in their company tax liability equal to 24.7% of the amount of the R&D expenditure. From 1 April 2023, it is proposed that the additional tax relief will be reduced to 86%, but this could potentially be in conjunction with an increase in the corporation tax rate to 25% if profits exceed a certain threshold; in that case from 1 April 2023 the reduction in the claimant company’s tax liability will be 21.5% of the R&D expenditure (or 16.34% if the company remains liable to tax at the 19% rate).
However, the R&D reliefs also allow SMEs that have a tax loss to ‘cash in’ the loss arising from R&D expenditure for a ‘payable credit’. Companies in this position will notice a significant reduction in their R&D tax credits on R&D expenditure from April next year. Currently, they are able to surrender their enhanced R&D tax loss (i.e. 100% ‘normal’ expenditure plus the 130% enhancement, so 230% in total) for a cash credit of 14.5% of that figure; this means that for every £100 of R&D expenditure they can currently claim a cash credit of £33.35.
From April 2023, in addition to the rate of enhancement being reduced from 130% to 86%, the cash credit rate for R&D tax losses ‘cashed in’ will also be reduced from 14.5% to 10%. For loss-making SMEs choosing to cash in their enhanced R&D expenditure for a payable credit, this means that from April next year, for every £100 of R&D expenditure, the cash credit that they can claim will be only £18.60 (£186 x 10%) i.e. only 56% of the amount that would be available in the absence of the proposed changes.
Given that recent published figures have indicated a reduction in overall R&D expenditure claimed under the R&D relief schemes for the first time since they were introduced (possibly due to a toughening of HMRC’s stance deterring genuine potential claimants in more recent times), it is possible that this proposed reduction in R&D credit rates might further deter companies from claiming R&D reliefs in the future.
On the positive side of the rebalancing, however, there will be an increased credit available under the R&D expenditure credits (RDEC) scheme, which is claimed by large companies and by SMEs which are ineligible to claim under the SME scheme (possibly due to receiving funding for their R&D or because they undertake R&D activities on a subcontract basis for other companies). RDEC currently allows a credit of 13% of the eligible R&D expenditure to be set against the company’s tax liability, although this credit is itself chargeable to corporation tax, so the overall net reduction in the tax liability is 10.53% of the R&D expenditure. From 1 April 2023, the RDEC credit will be increased to 20%; after deducting company tax at the new 25% rate that will apply from April next year, this will give an overall net ‘cash’ tax saving equal to 15% of the company’s R&D expenditure, a significant increase over the current figure.
Although the changes to the R&D tax relief rates are described as a rebalancing, it is highly likely that there will be more losers than winners; according to the Autumn Statement projections, the effect of this change is forecast to lead to an overall annual saving for the Exchequer of £215 million in 2023-24 when it is introduced, increasing every year to £1.34 billion for 2027-28. The proposed expansion of the reliefs to include data and cloud computing costs is insignificant in comparison.
It can be seen that the proposed rate changes will lead to greater alignment of the proportional cash outcomes on R&D expenditure incurred by companies in different situations. This greater alignment is a step towards moving to a simplified single scheme of R&D incentives, envisaged to be along the lines of the current RDEC scheme, which has been mooted previously in consultations regarding the overhaul of R&D tax incentives. The Government has announced that it will be undertaking a consultation on the design of such a single scheme.
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