Are you ready for the R&D tax credit reforms coming in 2023?
The Autumn Statement introduced changes to the Research and Development tax credit regime that will commence in April 2023. These changes will affect companies that carry out R&D activities and claim R&D Expenditure Credit (RDEC) or the R&D tax relief for small and medium (SME) sized companies.
The government has also announced its intention to open a consultation on the design of a simplified, single RDEC-like scheme for all businesses.
In the 2021 budget, the government announced reforms to R&D tax reliefs with the stated objectives of ensuring that the UK remained a competitive location for cutting edge research, that the reliefs continued to be fit for purpose, and that taxpayer money was effectively targeted.
Several reforms have already been announced, including bringing pure mathematics research within scope of the reliefs, including data and cloud computing as qualifying costs, restricting expenditure on some overseas R&D activities and a package of measures to target abuse and improve compliance. Draft legislation for these measures was published for comment on 20 July 2022.
What are the changes?
This measure will increase the rate of tax credit for companies that carry out qualifying R&D and claim the RDEC. RDEC is primarily aimed at larger companies but is claimed by SMEs in some cases.
The RDEC is a standalone credit that is brought into account as a taxable receipt in calculating trading profits. The current general rate is set at 13% of qualifying R&D expenditure. From April, the rate will increase from 13% to 20%.
Also in April, the SME additional deduction rate will be reduced from 130% to 86%, and the rate of the SME payable credit rate which can be claimed for surrenderable losses will be decreased from 14.5% to 10%.
Who will they affect?
Currently, an SME obtains additional tax relief equal to 130 percent of the R&D expenditure. From 1 April 2023 this will decrease to 86 percent. For a tax paying company, when considering the new 25 percent rate of corporation tax, this will reduce the effective incremental cash benefit from 24.7 to 21.5 percent.
Additionally, loss making companies can surrender losses for a cash R&D tax credit (RDTC). The RDTC rate was 14.5 percent and this is being reduced to 10 percent from 1 April 2023. At the moment, a company spending £100,000 on R&D could potentially surrender £230,000 for a 14.5 percent RDTC of £33,350 under the existing rules. This will reduce significantly to £18,600 under the new rules.
The RDEC works differently to the SME scheme. Instead of obtaining additional tax relief, the company obtains a credit (akin to a grant) which is itself taxable. The RDEC rate is increasing from 13 to 20 percent. T his results in a significant increase to the post-tax cash benefit from 10.53 to 15 percent with effect from 1 April 2023.
What are the aims of the changes?
It appears with these new measures the Chancellor is seeking to make the UK RDEC regime more competitive whilst controlling the overall costs of the R&D tax incentives. There are also concerns that the SME regime has been subject to abuse and error so the reduction in the benefits under the scheme is a blunt means to control the costs.
If you have any queries on how these changes might affect you, please get in touch with us to find out how we can help.
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