The palace of Westminster

Chancellor Announces Additional Changes to R&D Tax Relief

Jeremy Hunt unveils increased support for SMEs as turbulent time for the scheme continues.

Chancellor Jeremy Hunt announced further changes to the R&D Tax Relief scheme during the Spring Budget, including the provision of additional support for highly innovative loss-making SMEs.

These developments, which I have explained below, are broadly positive, especially compared to the controversial and harmful cuts announced in last year’s budget statement, which were set to remove more than £1 billion of support for early-stage innovators. 

At the same time, these changes could make it more challenging for companies to file complaint claims and navigate UK R&D Tax Relief, which has been in a state of near constant reform for almost two years. 

Businesses that do not file a complaint claim risk a time-consuming Enquiry, which could delay their funding for several months. 

If you would like to speak to someone about how the various changes to R&D Tax Relief affect your upcoming claim, our experts would be more than happy to help you. Just get in touch!

Increased payable credit for loss-making SMEs

Loss-making SMEs that invest at least 40% of their total expenditure on qualifying R&D will receive a payable tax credit worth 14.5% of their surrendered losses instead of the regular 10%. 

This means eligible SMEs will be able to recoup up to 27p for every £1 they spend on wages, raw material, software and other claimable resources required for R&D. 

The new rates, designed to improve support for highly innovative businesses, affect qualifying expenditure made on or after 1 April 2023. 

Loss-making companies are currently able to recoup up to 33p per £1 of investment before this date. So, although the new rate represents an increase relative to the planned changes out forward in the Autumn statement, the total financial support available for innovating startups and scaleups is still falling. 

The decision to lower subsidies for innovating businesses during a time of economic uncertainty clearly contradicts the government’s ambitions of polishing the UK’s credentials as a science and technology superpower.  

The change also creates an incentive for companies that have invested close to 40% of their expenditure in qualifying R&D to inflate their claim size to access the higher surrender rate. 

This may cause a rise in abusive claims – a discouraging possibility given growing abuse was a key reason the government decided to cut SME R&D Tax Relief in the first place.

Relief cuts for overseas subcontractors postponed by 12 months

The government has postponed its plans to make most investments in overseas subcontractors ineligible for R&D Tax Relief relief until 1 April 2024. 

This means that, if you are using overseas subcontractors in your R&D, the amount of relief you can receive on that expenditure will not change until you begin a financial year starting on or after 1 April 2024, all else being equal. 

The government says the postponement is designed to give it more time to consider how removing relief on overseas subcontractors would dovetail with its nascent plans to unite SME R&D Tax Relief and the Research and Development Expenditure Credit into a single subsidy. 

Plans to dial down relief for spending on offshore skills were first unveiled during the 2021 Budget and Spending Review. Rishi Sunak, then Chancellor, said the move was designed to capture more of the spillover effects generated by innovative research and improve the return on investment generated by the scheme.

If and when it comes into force, this substantial reduction would have a severely negatively effect the many startups and scaleups that rely on overseas subcontractors to access essential skills in a cost-effective way.

SME-RDEC merger considerations ongoing

Finally, the government is still considering whether to merge SME R&D Tax Relief and the Research and Development expenditure credit (RDEC)

It is planning to submit draft legislation on a combined scheme this summer alongside the draft finance bill. Such a scheme is likely to offer a flat rate of relief on qualifying expenditure, regardless of a company’s financial position, as is the case with RDEC. 

The government has committed to announcing its decision on creating single scheme, as well as what that scheme would offer qualifying businesses, ‘at a future fiscal event’, such as a budget statement. 

GrantTree will be closely monitoring future announcements and sharing substantive details on the government’s deliberations as we receive them. To keep up to speed, make sure you subscribe to GrantTree’s newsletter. 

Expert guidance on your upcoming claim

This is a time of great change for R&D Tax Relief. In addition to the developments announced during the budget statement, a range of reforms to the scheme will soon take affect, impacting the claims process, eligible costs, and the amount of relief available.

Keeping up to speed with these changes can be difficult,not to mention stressful, with HMRC aggressively clamping down on inaccurate claims.  

If you would like some help navigating these changes, GrantTree’s R&D Tax Relief experts would be happy to help you.

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