Within the Autumn Statement, the Government announced significant changes to R&D tax relief for SMEs. Our tax experts explain what has changed and how business owners could be affected.

The Government’s Autumn Statement contained some unexpected changes to the R&D tax credit scheme. On 17th November 2022, the Chancellor of the Exchequer announced that there will be a reduction in the relief available to small and medium enterprises (SMEs) from April 2023.

According to Jeremy Hunt, the changes to R&D tax credits have been introduced to limit the number of fraudulent claims, however, lowering the relief rate is likely to have a negative impact on research and development activity levels for start up development companies and those undertaking long term projects.

What are R&D tax credits?

The main aim of R&D tax credits is to reward businesses for innovation. The UK Government scheme allows businesses to claim relief on Corporation Tax for costs incurred on research and development (R&D) projects.

You could be eligible to claim R&D tax relief as an SME business owner if:

  • Your company employs less than 500 staff
  • Your turnover is under €100 million or your balance sheet total is less than €86 million.

Details of full eligibility criteria can be found on the Government website.

What changes were announced in the Autumn Statement?

The Autumn Statement stipulated that the rate of enhanced deduction would decrease to 86% and the R&D tax credit rate that could be applied to qualifying losses would reduce to 10%. This will come into force on 1st April 2023 and apply to all expenditure incurred after this date.

Before the latest budget announcement, SMEs could claim an additional 130% corporation tax deduction for qualifying expenditure on R&D projects. This reduced corporation tax liabilities for profitable companies and gave companies operating at a loss the opportunity to exchange their losses for a tax credit at a rate of 14.5%.

How could the changes affect SMEs?

As the main claimants of R&D tax relief, SMEs are likely to be affected by the rate reductions. The changes to R&D tax credits have reduced the relief that is available to businesses during a challenging economic time, however the impact might not be as significant for profitable companies.

The planned increase of the corporation tax rate to 25% from 1st April 2023 will lessen the impact of a relief reduction on profit-making companies. It is important to note that the corporation tax rate will remain at 19% for companies with profits between £50,000 and £250,000.

It is a disappointing policy change during a difficult period, but, after closer analysis, the announcement is not as bad as first thought for profitable small and medium enterprises. The loss making companies undertaking R&D activity and using the credit system to fund innovation will, however, feel the pain of this decision.

Gary Devonshire, Tax Advisory Partner at PKF Smith Cooper

If you would like tailored advice on how the R&D tax credit changes could impact your business, contact us today to talk to one of our corporate tax specialists.