Additional relief for R&D-intensive SMEs
The Chancellor of the Exchequer announced at the 2022 Autumn Statement various changes to the generosity of the two R&D tax relief schemes from 1 April 2023.
The R&D expenditure credit (RDEC) scheme (which chiefly applies to large companies) was made more generous, with the rate applied to qualifying R&D expenditure in calculating the tax credit increasing from 13% to 20%. The SME scheme was made less generous, with the rate applied in calculating the additional deduction for tax purposes being reduced from 130% to 86%, and the rate applied when losses are surrendered for a payable credit being reduced from 14.5% to 10%.
At the Spring Budget 2023, the Chancellor announced a partial reversal of these changes, with the payable credit rate under the SME scheme set to remain at 14.5% for “R&D-intensive SMEs”.
Draft legislation
The government published various pieces of draft tax legislation on 18 July 2023. These included legislation relating to the payable credit rate of 14.5% for R&D-intensive SMEs, and legislation for a proposed merged R&D tax relief scheme, based on the current RDEC scheme. The government is yet to decide whether it will proceed with this merged scheme but, even if it does, the rules as they are now due to apply for R&D-intensive SMEs are expected to remain in place.
Eligibility
An R&D-intensive SME is, in outline, an SME whose R&D expenditure amounts to at least 40% of its total relevant expenditure.
“R&D expenditure” for these purposes will essentially be expenditure that qualifies for R&D tax relief. “Total relevant expenditure” will comprise the expenditure that is brought into account in calculating trading profits for corporation tax purposes.
Where a company is not connected with another company, the position is considered on a standalone basis. Where the company is connected with at least one other company, the 40% threshold is considered with reference to the R&D expenditure and the total relevant expenditure of the connected companies together.
Commentary
Assuming the government does go ahead and introduce the single merged R&D scheme, the continuing existence of this measure for R&D-intensive companies will undermine the simplification rationale behind merging the current schemes. A better approach for the future could be to allow a higher “expenditure credit” rate for R&D-intensive SMEs under a single scheme but there is currently no indication that the government will take this approach.
Either way, the additional relief that this measure provides will be very welcome to those who can benefit from it. However, there will undoubtedly be some companies that just fall on the wrong side of the threshold who could be forgiven for feeling aggrieved.
One other issue that some companies will need to consider is the timing of any claims. The draft legislation is written on the basis that this payable credit rate of 14.5% for R&D-intensive SMEs will apply to R&D expenditure incurred on or after 1 April 2023. As the legislation has not yet taken legal effect (and is not expected to do so until next year), it is envisaged that some eligible SMEs who would ordinarily be looking to make claims covering the period from 1 April 2023 in the coming months will either need to claim under the current rate of 10% and subsequently amend their claims or, alternatively, delay submission of their claims until the legislation takes effect. We imagine that most eligible businesses will want to make an initial claim at the 10% rate for the immediate cash flow advantage, but the most appropriate course of action may vary between businesses.
The draft legislation is subject to technical consultation until 12 September 2023, following when it is expected to form part of a Finance Bill either later in 2023 or early in 2024.
Our experts at Moore Kingston Smith can guide you through these complexities, and the practical implications it will have. Please do get in touch with our experts if you would like to discuss any aspect of R&D tax reliefs in the UK.