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The Government has long tried to balance the benefit provided by the R&D scheme to incentivise long term growth in innovation against what it perceives as sustained and widespread abuse of the scheme by less scrupulous taxpayers.
As part of his first Autumn Statement, the new Chancellor Jeremy Hunt announced several changes to the scheme to focus the purpose of the tax relief.
Existing R&D Small and Medium sized entities (those with fewer than 500 staff and either turnover below €100m or gross assets below €86m) obtain an additional 130% deduction on their qualifying spend resulting in a total tax deduction in the sum of 230% of the amount spent. Where the company is in an overall loss position, it could surrender these losses for a cash repayable credit equivalent to 14.5% of the loss surrendered, capped to the lower of 230% of the qualifying spend or the losses available.
As part of the changes, the rate of R&D relief will be reduced from 130% to 86% and the surrender amount will be reduced from 14.5% down to 10%. However, it is also important to review these changes in the context of the proposed increase in the corporation tax rate from 19% to 25% from April 2023.
The additional deduction against corporation tax will be reduced from 130% to 86% but at the same time the relief will be higher due to the increase in the rate of corporation tax. As a result, the tax relief will be reduced from 24.7% to 21.5%. This effective rate will be higher for companies that fall into the marginal rate (22.79%) and lower for those that pay tax at the lower 19% rate below £50,000 (16.34%).
Where the company is 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%.
The Research and Development Expenditure Credit (RDEC) scheme primarily focuses on larger companies that breach the thresholds outlined previously or are excluded from claiming under the SME scheme for another reason (for example due to state aid).
Under the proposed changes, the RDEC rate will be increased from the current 13% to 20%. The RDEC credit is taxable within the company and thus the net effective rate of the increase is from 10.53% to 15%, eroding the headline 7% increase somewhat. The RDEC credit can then be used to offset the tax liability arising in the year or if the company is in an overall loss position, it can claim a repayment credit broadly equivalent to the net amount after corporation tax.
The reduction in the more generous SME scheme rates is the Government’s rather blunt response to make it less attractive to those trying to take undue advantage of the scheme under its current format. How far this will go, alongside the existing and proposed changes (such as tying it to PAYE and NIC liability and excluding overseas expenditure) remains to be seen.
If you would like further information on how the Autumn Statement will affect Research & Development, please get in touch with our team.
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