Budget 2023: Research and Development and creative incentives

The Government remains committed to driving innovation and growth within the UK economy with Research and Development (R&D) relief, but it is felt this has to be balanced with the perceived misuse of the relief, particularly the very generous SME scheme, where spurious or worse, fraudulent claims are made.

Autumn statement changes

We previously highlighted the changes being implemented from April 2023. In summary the enhanced deduction under the SME scheme is being reduced from 130% to 86% and the surrender amount for cash will be reduced from 14.5% down to 10%. With the rise in the corporation tax rate to 25%, the real impact of this will be that tax relief will be reduced from 24.7% to 21.5% (slightly higher or lower for those at the marginal rate or lower rate respectively). Where companies are loss making, the repayment from HMRC will be reduced from 33.35p for every £1 of qualifying expenditure to 18.6p for every £1 of qualifying expenditure, resulting in a reduction of approximately 45%.

Spring 2023 changes

As part of the new measure announced in the Spring 2023 Budget, loss-making SMEs with an ‘R&D intensity’ (see below) of at least 40% will be eligible for a 14.5% surrender instead of the standard 10% from April 2023. What this means is that instead of the 18.6p for every £1 of qualifying spend, these loss-making companies will receive 26.97p for every £1 of qualifying spend, resulting in additional 31% cash from HMRC for those loss-making companies, most of whom are at the early stage of development.

It is worth noting that the enhanced deduction remains 86% for these companies and so the new relief is still less generous than the previous regime.

R&D intensity

As noted above, the new measure creates a R&D intensity requirement. The calculation of R&D intensity is the ratio of the company’s qualifying R&D expenditure, for both the SME and RDEC schemes, in a period to the total expenditure in the same period. Total expenditure is the total expense figure in the profit and loss account, adjusted for any amounts not deductible for CT purposes. An additional deduction is available for s1308 claims (essentially expensing of intangibles previously capitalised).

The calculation will take into account all associated companies to prevent manipulation by way of fragmentation. Further anti-avoidance rules are also expected within the final legislation.

Mechanics

The changes are effective for expenditure incurred after 1 April 2023 and claims are to be made in the company tax return as normal. Where accounting periods straddle this date, the additional rate will only apply to expenditure after 1 April, but the R&D intensity will be calculated by reference to expenditure for the entire accounting period.

The change will be legislated in a future Finance Bill and so eligible companies will only be able to obtain relief once the legislation has been enacted. There is currently no timeframe for this and claims under this scheme may take longer to process as additional checks may be required. Therefore, it is disappointing that those eligible companies who need the cash could be subject to delays, particularly impacting their cashflow.

Other changes

It is worth mentioning that the previously communicated change from 1 August 2023 where companies must inform HMRC of their intention to claim R&D using a new digital form will go ahead.

However, the previously announced restriction on some overseas expenditure has been delayed until 1 April 2024 to allow the government to consider the potential of a merged R&D relief, which was consulted on recently.

Creative sector tax reliefs

The UK has a number of creative industry tax reliefs intended to support and encourage investment in these sectors. As part of the Spring 2023 Budget the Chancellor announced that the film, TV and video games tax reliefs will be reformed to refundable expenditure credits, similar to the RDEC scheme for R&D.

Currently the reliefs target 5 sectors in particular, being:

• Animation
• Children’s television
• Film
• High-end television
• Video games

Subject to the relevant conditions being met, the schemes aim to provide an additional deduction against taxable profits. This deduction is the lower of 80% of ‘core costs’ (broadly direct costs for the production) or total core costs incurred in the UK or EEA.

As part of the change, there will be an expenditure credit directly traceable to the expenditure incurred. This will be set at a rate of 34% for video games, film and high-end TV and 39% for animation and children’s TV. The changes are expected to be brought in for accounting periods ending on or after 1 January 2024. It is not yet clear what the surrender amount under this new scheme, and further details are expected to be published in due course.

The current tax reliefs will close to new productions from 1 April 2025, with some grandfathering provisions for those productions still not concluded.

If the Budget has raised any questions for you, book your place on our Budget question time webinar this Friday, 17 March at 9:30am. Alternatively, if you would like further information, please get in touch with our team.