Following the Autumn Statement, an initial review of the changes to the R&D SME and RDEC schemes is outlined below, albeit, comprehensive details of the changes announced are not yet available.
SME R&D Scheme
There was an expectation that SME R&D Tax Relief additional deduction rate would be reduced from 130% to 100%, to compensate for the planned increase in the Corporation Tax (CT) rate from 19% to 25% from 1 April 2023. This expected rate change would have retained an effective c25% CT liability saving.
The SME R&D Tax Relief additional deduction rate has in fact been reduced to 86%, a much larger reduction than expected. This has the effect of reducing the effective CT liability saving to 21.5%, therefore an approximate reduction in the resulting CT liability savings of circa 3% - 3.5%.
In monetary terms: under the current R&D rates a £100,000 qualifying R&D spend would have resulted in a Corporation Tax liability reduction of £24,700, for a profit-making Company.
The new R&D rates, a £100,000 qualifying R&D Spend will now result in a Corporation Tax liability reduction of £21,500, for a profit-making Company.
For loss making companies who undertake qualifying R&D, they could have previously claimed a repayable R&D Tax Credit on the R&D related surrendered losses. For those Companies, there has been a further reduction in value relating to the scheme.
The rate of repayable Tax Credit on surrendered losses has been reduced from 14.5% to 10%, with the effect of creating a marginal Tax Credit rate of 18.6% instead of 33.35%.
In monetary terms: under the current R&D rates, a £100,000 qualifying R&D spend would have resulted in a Repayable Tax Credit of up to £33,350, for a loss-making Company.
The new R&D rates, £100,000 qualifying R&D Spend will now result in a repayable Tax Credit of up to £18,600, for a loss-making Company.
RDEC Large Scheme
There is however some better news for Companies claiming under the Large RDEC scheme. The rate of R&D Expenditure Credit has risen significantly from 13% to 20%.
The RDEC scheme is available for large companies with 500+ fulltime staff, €86m gross assets and or €100 turnover, or Companies in receipt of other grant funding, who would normally clam under the SME scheme.
In monetary terms: under the current R&D rates, a £100,000 qualifying R&D spend would have resulted in a net RDEC Credit of £10,530.
Under the new R&D rates, £100,000 qualifying R&D Spend will now result in a net RDEC Credit of £15,000.
When combined with the available R&D grants, the RDEC scheme could now prove a real alternative for SME businesses, maybe?
Summary
When considered in light of the upcoming 6 month post year end pre-notification requirements (to be introduced from 1 from April 2023) and the `Above the Line` (ATL) nature of the RDEC scheme (i.e. Tax Credit is included within the accounting records as income), in my opinion the revised R&D rates appear to be a considered push to synchronize both schemes into a single RDEC based scheme in the future and possibly the next budget.
For further guidance on any of the tax measures discussed in this article, please contact your usual MHA advisor or Contact Us.
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