Chancellor Jeremy Hunt has just announced significant changes to SME R&D Tax Relief and the Research and Development Expenditure Credit (RDEC). Here’s what you need to know.
In Thursday’s Autumn Statement, the Chancellor confirmed the government is making substantial cuts to the SME R&D Tax Relief scheme.
The SME scheme’s enhancement rate will fall from 130% to 86%. The value of the payable tax credit, which is available to loss-making SMEs and companies taken into an artificial loss by enhancement, will fall from 14.5% to 10%.
As a result, loss-making SMEs will lose up to 44% of their relief while profit-making companies will lose up to 13%. The reduction for profitable companies is somewhat offset by the planned rise in corporation tax for more profitable companies.
SMEs breaking even will lose up to 53% of their relief, partly because of an effect we call ‘the valley of death’.
In better news, the relief available through RDEC will rise from 13% to 20%. After tax, and taking into account the corporation tax rise, RDEC will be worth 15p for every £1 invested in eligible expenditure, up from 10.5p.
These changes will take effect on 1 April 2023 and will apply to qualifying investments made on or after that date.
According to the government’s full statement, this may be the first step towards combining SME R&D Tax Relief and RDEC into a single scheme.
Why is this happening?
For several years, the government (or governments) has been concerned about the SME scheme’s ability to incentivise innovation and generate a return on the taxpayer’s investment.
These doubts, coupled with the Chancellor’s desire to plug the ‘black hole’ in the country’s finances by reducing public outgoings by £55 billion, made the SME scheme vulnerable to cuts.
The government’s confidence in the scheme has been eroded over several years by a significant rise in the number of fraudulent and abusive claims.
HMRC estimates that fraudulent claims cost the exchequer close to £500 million in the 2020-21 tax year. The number of abusive claims – those that include ineligible projects and costs to attract more relief – is harder to measure. However, many in and outside of government believe they have increased dramatically in recent years, thanks to the actions of a growing number of unscrupulous R&D Tax Credit agencies, as well as businesses that inflate their own claims.
By redirecting funding from the SME scheme to RDEC, which is less vulnerable to abuse – in part because it does not provide relief on subcontractor costs – the government is hoping to stimulate more innovation while making more efficient use of the public purse.
To be clear, we do not believe that cutting SME R&D Tax Relief will deter abuse. Indeed, it’s possible that, in the short term, fraud may increase as companies look to exploit the higher relief while it is still available.
Moreover, these cuts risk reducing innovation among small and medium-sized businesses – which contribute billions to the UK economy – and limiting the technology sector’s ability to shorten the recession by stimulating growth.
What does this mean for my claim?
Whether you are applying for the SME scheme, RDEC, or a combination, the challenge ahead is to make the most of these changes.
If you are looking to claim SME R&D Tax Relief, this means maximising your expenditure between now and 1 April. You can do this with Advance Funding or by capitalising on other forms of government funding, such as innovation grants.
If you are looking to file for RDEC, this means working with a partner that can help you capitalise on the scheme’s new generosity by ensuring you are claiming for all your eligible expenditure while protecting yourself from HMRC’s stricter approach to compliance.
As a trusted R&D Tax Credits consultant with 12 years of experience filing accurate, compliant claims, GrantTree is here to help you access your full entitlement and structure your submission to maximise your funding.