At the 2022 Autumn Statement the Chancellor announced that, as part of the ongoing R&D tax reliefs review, the government would reform the R&D tax relief system.
As part of these reforms, for expenditure from 1 April 2023 the Research and Development Expenditure Credit (RDEC) rate would increase from 13% to 20%, the small and medium enterprise additional deduction rate would reduce from 130% to 86%, and the SME payable credit rate would decrease from 14.5% to 10%.
In the Spring Budget, a promising new initiative was announced to bolster research and development efforts among loss making SMEs. The proposal, affecting expenditure made on or after 1st April 2023, is designed to incentivise SMEs investing significantly in qualifying R&D activities by offering to retain the payable tax credit of 14.5% instead of the new reduced 10%. This article explores the key features and implications of this additional tax relief for R&D intensive SMEs and outlines the steps companies can take to make the most of this opportunity.
Understanding the New Rules
The additional tax relief for R&D intensive SMEs was announced after concern was raised in the industry following the announcement in autumn 2022 that the government would be reducing the payable tax credit of the SME scheme. This additional support aims to encourage innovation and stimulate economic growth by offering enhanced tax incentives to loss making SMEs that heavily invest in R&D. The initiative is set to augment the R&D tax credit framework and strengthen the UK’s position as a hub for technological advancement and innovation.
R&D Intensity Definition
A fundamental aspect of the proposal is the introduction of a R&D intensity definition, which determines a company’s eligibility. R&D intensity is calculated as the ratio of a company’s qualifying R&D expenditure for a specific period to its total expenditure for the same period. Total expenditure is calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any expenditure used under s1308 Corporation Tax Act (CTA) 2009 and subtracting any non-deductible expenses for CT purposes. SMEs will be eligible for the additional tax relief if their R&D intensity is 40% or higher during the relevant period.
Companies will be required to indicate their eligibility as an R&D intensive company on the additional information form which was introduced in August 2023. This step ensures that the application process remains straightforward and streamlined for SMEs.
Key Highlights of the R&D-Intensive Additional Relief
Enhanced Tax Credit: SMEs investing more than 40% of their costs in qualifying R&D activities will be eligible for an increased payable tax credit of 14.5%, instead of the new and reduced 10%. This boost in the tax credit aims to provide a substantial financial incentive for SMEs to allocate a larger portion of their budget to R&D initiatives. The enhanced duction will remain at 86%.
Applicability: The additional relief will apply to expenditure incurred after 1st April 2023, aligning it with the new financial year. This means that only R&D expenses accumulated from this date onward will be eligible for the R&D intensive tax credit.
Claiming Process: SMEs can claim this tax credit in the same manner as current R&D tax credits, making it accessible and easy to navigate. However, it’s important to note that the legislation for this scheme is not yet in place, and as such, SMEs have two options: they can either delay their claim until the scheme is operational or claim the current scheme with the reduced 10% tax credit and subsequently amend it to the higher credit once the legislation is established.
The Impact of Potential Scheme Merger
The proposed merger of the SME and RDEC schemes adds an element of uncertainty to the future of the additional relief for R&D intensive SMEs. It remains unclear whether this initiative will be affected by the proposed consolidation of these two programs. SMEs interested in benefiting from the enhanced tax credit should keep a close watch on updates regarding this matter.
The additional support for R&D intensive companies offers a significant opportunity for SMEs to boost their R&D efforts and subsequently enjoy an increased payable tax credit of 14.5%. By focusing on R&D intensity, the government aims to reward companies that prioritize innovation, fostering economic growth and technological advancement in the UK. SMEs should carefully consider their options, including when to make a claim, and stay informed about any potential changes related to the proposed merger of R&D tax credit schemes.