Changes to the R&D Tax Relief Schemes in 2022

Following concerns that the SME R&D Tax relief scheme is not delivering the anticipated benefits, the chancellor has announced a reduction of over 33% to the benefit rate.

For expenditure incurred on or after 1st April 2023, SMEs or Small & Medium sized Entities, will now be able to claim an enhanced deduction of 86% (instead of the current 130%) on qualifying R&D expenditure.

The cash-back rate for loss-making companies has also been reduced to 10% from the current 14.5%.

What Will This Look Like?

For SMEs paying tax at 19%, the additional benefit will reduce from 24.7% to 16.34%. At a tax rate of 25% the additional benefit will be 21.5%.

For loss-making SMEs claiming cash back, the rate will reduce from the current 33.35% on qualifying R&D expenditure to 18.6%.

Benefit Changes for Larger Companies

In contrast, for non-SMEs or large companies, the R&D Expenditure Credit (RDEC) rate will be increased to 20% from the current 13%. As the credit is taxable, the net benefit (after tax of 25% from 1st April 2023) will be 15% compared to the current 10.53% (after current tax rate of 19%).

What Has Triggered Such a Drastic Rate Change for SMEs?

• Despite spending huge sums on the R&D tax incentive schemes, the related return on investment has been relatively low. Recent FT articles have reported that the OBR has estimated the cost of the reliefs to
  increase from £7.7bn in 2021-22 to £11.9bn in 2026/27.
• Despite this investment, the spending by British businesses on R&D was 4 times the value of the tax relief, compared with the OECD average of 15 times.

• It was further reported that the RDEC scheme which is aimed at larger companies, generated £2.40 to £2.70 of additional R&D expenditure for each fl of tax relief claimed, while the SME scheme generated £0.60 to £1.28.
• Other than this, HMRC has recently intercepted the payment of high- value fraudulent claim monies to SMEs. This has resulted in increased scrutiny of these claims, as well as the planned introduction of measures such as requiring new claimants to make an advance notification to claim to HMRC, and a requirement for company directors to sign off on the R&D claim, amongst others. In the meantime, the government has recently consulted on other points, including how to make the scheme and related guidance easier to understand, to prevent the submission of incorrect claims.

Will These Changes Achieve Government’s Objectives of Increasing Their Return on Investment on the SME Scheme?

Today’s changes show that the government’s focus is on the large company RDEC scheme, where the return on investment is much higher than the SME scheme.

The SME rate reduction will be disappointing for genuine claimants and in particular, micro-businesses who rely on this funding for their R&D investment.

It will be interesting to see whether, with the rate decrease, will the smaller SMEs attempt to submit claims themselves, rather than use advisers for this purpose? Will this result in more incorrect claims being submitted, or will they give up on making claims altogether, potentially impacting UK innovation, of which they are a key part?

Only time will tell.

This guest article was written by Aarti Varia of iTax Advisors.