In the Autumn Statement 2022, the Chancellor has refrained from making any sweeping changes to the mechanisms of R&D Tax Relief, restricting his amendments to simple rate changes to both the SME and RDEC schemes.
The changes are not unexpected, but will disappoint many in the SME community. The reduction to both the main rate of relief and the credit will see small, innovative companies hit the hardest, particularly those just starting to turn a profit. This is somewhat divergent with the government’s stated aim of supporting UK innovation as part of the foundation for economic growth. The OBR’s statement that the changes will have no detrimental effect in investment, and the promises of a review of what further support is needed by SME's will be cold comfort to those who have relied on R&D relief to help fund their development programmes.
As others have pointed out, the changes do not substantially address concerns over fraudulent claims, other than potentially reducing the overall cost of this fraud by making the pot smaller. I think that most advisors and claimants would have welcomed more targeted focus on fraud and dishonest claims, rather than measures that add roadblocks or value reductions to claimants across the board.
One ray of sunlight is that the changes to the rates, along with the previously announced updates to the scheme, might signal some stability for the schemes amid recent talk of overhauls and sweeping change. The Government is likely to want to review the impact of the changes before making any more substantial tweaks, so claimants can have some confidence over what they are eligible to claim for over the coming years.
The impact of these changes is that a typical profit-making SME will see the benefit of making a claim drop by around 34%, from 24.7p to 16.3p on the pound. An SME paying the new higher 25% rate of tax will see a smaller reduction of 13% leaving a benefit of 21.5p on the pound.
Large companies will see somewhat of an improvement in their claims, with the post-tax benefit of RDEC moving from 10.5% to 15%, even with the increase in tax rate. A large company still making small profits would see their claims being worth up to 16.2%, which represents an improvement of more than 53%.
These rates come into effect for expenditure incurred after 1 April 2023. This means that we will start to see the impact on claims when tax returns are submitted for companies with year ends from 30th April 2023 onwards.
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