For expenditure on or after 1 April 2023, the research and development expenditure credit (RDEC) rate will increase from 13% to 20%, the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.
These Autumn Statement 2022 rate changes will be legislated for in the Autumn Finance Bill 2022.
This reform ensures that taxpayer support is as effective as possible, improves the competitiveness of the RDEC scheme, and is a step towards a simplified, single RDEC-like scheme for all, the Treasury said.
There will be a consultation on the design of a single scheme, and the Treasury will work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost for supporting R&D.
As previously announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance. These changes will be legislated for in Spring Finance Bill 2023.
The measure is expected to raise £620m in 2023-24, rising to £1.07bn in 2024-25 and £1.25bn by 2025-26.
The Association of Taxation Technicians (ATT) expressed concern that planned reductions in the tax relief available for R&D will harm small businesses, without having a material impact on fraud.
Senga Prior, chair of ATT’s technical steering group, said: ‘We share the government’s concerns over abuse of the R&D relief schemes and strongly support efforts to crack down on such abuse of the tax system and improve compliance. But we do not believe that restricting the level of relief available to all SMEs is a proportionate way to achieve this.
‘The smallest and newest businesses which are often most in need of the support offered by the R&D scheme stand to lose out under these plans, even though they are carrying out genuine R&D. We worry that reducing the relief available to these businesses could affect their ability to grow and fund and carry out new research.’
The changes will cost SMEs £4.5bn in lost tax benefits over the first five years of the changes but the overall cost to the economy of lost R&D investment could be far greater.
Penny Simmons, legal director at Pinsent Masons, said: ‘The changes to R&D tax credits will punish the UK’s most innovative start-ups. It's hugely disappointing to see the government cutting R&D tax credits for small businesses, which contribute so much to economic growth.
‘R&D tax credits for SMEs, which can be claimed as a cash repayment provide crucial cash injections for start-ups who often have limited access to alternative funding. By making R&D tax credits less generous for the UK’s most innovative small businesses, the government risks damaging the UK’s future growth prospects.
‘The proposed increase to the RDEC will predominantly help larger businesses who already have far greater access to alternative financing for R&D projects.’