Research and Development Tax Credits update from the Autumn Statement

Sam Palmer
Sam Palmer

For UK start-ups and small enterprises, the Chancellor significantly reduced R&D Tax Credits in his Autumn Statement.

Sam Palmer

Even though certain reductions were generally anticipated, the magnitude of the reduction surprised many in the R&D industry.

With a significant decrease of around 44% of their R&D Tax Credit set to take effect on 1 April 2023, loss-making start-ups will be disproportionately affected, giving businesses little time to review their R&D investment plans.

The fact that the new rates will go into effect on April 1, 2023, makes the timing of the move extremely tight. In contrast, past announcements were implemented with more than a year's advance warning. Given that many SMEs have long-term R&D investment plans and rely heavily on R&D Tax Credits for funding, providing only four months' notice of a roughly 45% drop in the benefit could have a severe negative impact on many of the UK's most promising innovation prospects.

The additional deduction for R&D expenditure will reduce from 130% to 86% and the payable tax credit will reduce from 14.5% to 10%.

As a result, loss-making SMEs will be eligible to claim a receivable tax credit of £18,600 for every £100,000 of qualifying R&D spending (down from £33,350 previously). Profitable SMEs subject to the new 25% corporation tax rate will receive a tax benefit of up to £21,500 per £100,000 of spending, whereas businesses subject to the 19% corporation tax rate £16,340 (down from £24,700 previously).

The RDEC rate will increase from 13% to 20%.

This means that, starting on April 1, 2023, for enterprises subject to the new 25% corporation tax rate, the net tax benefit for RDEC claimants will rise to 15.0% (from 10.53%). The impact of the planned elimination of overseas expenditure from all R&D Tax claims should be lessened by the increase in the RDEC rate.

These changes show that the government believes that the RDEC programme is superior to the SME programme in terms of effectiveness in accomplishing policy goals, like the creation and preservation of high-value jobs. Per £1 of government funding, it encourages more private investment in research and development.

A suggested streamlined single RDEC-like scheme will be the subject of a consultation as the R&D reform agenda moves forward. Better news for SMEs: any additional support required for R&D-intensive SMEs that are impacted by the changes will be taken into consideration during the consultation.

It is encouraging that the Chancellor has reaffirmed the government's general commitment to R&D support and to enhancing how the entire corporate, regulatory, and infrastructure environments encourage innovation in the economy.

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