Was the Government’s Autumn Statement the most defining fiscal decision of our times?

by Pronovotech

Tax rises across the board and massive spending cuts – all largely expected of course – are a sobering reminder of just how parlous a state the country’s finances have become.

For the R&D tax schemes though there is one thing of particular significance.

For the first time since they were introduced in 2000, the tax benefits of the SME scheme have been substantially reduced. Even the financial crash of 2008 saw the scheme survive unscathed. At the same time, the R&D Expenditure Credit (“RDEC”) scheme – aimed at large companies primarily – has been enhanced significantly.

The SME scheme benefit is to be reduced in two ways

  • Firstly, the additional deduction will go down from 130% to 86% from 1 April 2023.

The effect in terms of tax benefit is somewhat muddied because of the simultaneous increase in corporation tax rates, but for a company paying the maximum rate of 25% the benefit will decrease from 24.7% of qualifying expenditure to 21.5% whilst that for a company still paying at the 19% rate will reduce from 24.7% to 16.34%.

  • For a loss-making company, the cash credit currently available is a maximum of 33.35% of qualifying expenditure; from 1 April 2023 this will reduce to just 18.6%.

Changes to the RDEC scheme

In contrast to the substantial reduction in benefit under the SME scheme, here there is to be a significant enhancement to the RDEC scheme for large companies (although SMEs are also able to claim under it for projects that have been subsidised by grants or, in some cases, that have been contracted to them).

The RDEC operates differently to the SME scheme.

Effectively a taxable grant that can be set off against corporation tax due or repaid in cash if no tax liabilities exist.

The current rate is 13% of qualifying expenditure so after corporation tax of 19% the benefit in net terms is 10.53%.

From 1 April the rate increases to 20%, so a company paying the full 25% corporation tax rate will see a net benefit of 15%.

Why are these changes being made?

The overall effect of the changes is to narrow the differential between the SME and RDEC schemes.

The logic of this change, on the face of it, appears difficult to understand – successive governments have always given lip service at least to championing smaller enterprises on the basis that they need the most financial assistance and, allowed to flourish, will one day grow to become world leaders themselves.

In the context of other changes announced however it is possible to view the change of emphasis as a reaction to the growing perception that the generosity of the SME scheme has been open to abuse.

HMRC have become increasingly aware of an increase in erroneous or even fraudulent claims, spurred on by a significant increase in the number of advisers felt to be less than reputable with … little respect for the rules. So, following on from previous announcements on tightening reporting requirements and pre-notification, the drastic cut in benefit might be part of an overall push to discourage bad faith claims as much as a fiscal austerity measure. We expect to learn more through our discussions with HMRC in the coming months.

One thing the changes make absolutely clear is the need for companies to be sure of getting the right advice from established advisers. Here at Pronovotech we have been helping innovative companies of all sizes since 2006.

If you would like to discuss the impact of the changes on your R&D claims, please get in touch now.