The Chancellor’s recent Autumn Statement contained a few changes on R&D (mainly around rates) but I’ve seen quite a few commentaries that seem to have forgotten it’s only a part of the story, in terms of what’s going on at the moment. Terms such as “disappointing” and “lazy” have been bandied around. But there’s more to consider in my opinion and hence the changes made more sense than that.
For costs incurred after 1 April 2023, the SME rate was reduced by 44% from 130% to 86%. Disastrous on the face of it BUT, in real terms, only a 3.2% reduction to the current benefit (from 24.7% to 21.5%) if profits of over £250k are made, as it is offset by the huge hike in the corporation tax rate (from 19% to 25%) increasing the relative tax savings made.
Not so great news for smaller SME profits (under £50k profit stays at 19% tax, so only 16.34% benefit) and loss-making SMEs where the tax credit falls from 33.35% (100% spend + 130% R&D rate x 14.5% repayable credit) falls to just 18.6% (100% spend + 86% R&D rate x 10% repayable credit).
Better news for large companies with a big R&D Expenditure Credit benefit increase from 10.53% (13% RDEC rate, net of the 19% tax) to 15% (20% RDEC rate, net of 25% tax).
Worth mentioning that the RDEC increase also covers SMEs doing work for large companies and also for those claiming grants (which are now more attractive) as they only lose 6.5% benefit now (21.5% down to 15%) where it was 14.17% previously (24.7% down to 10.53%).
It was to be expected I think. Particularly given the reports and coverage over previous months highlighting the lower value for money of the SME regime compared to the RDEC one. Reducing the perceived “loss” to the Exchequer from smaller companies who have yet to turn a profit (or only a very small one) and contribute to the growth of the economy. It’s also a first step (reducing the benefit difference) towards aligning the regimes into one.
The critics largely pointed out that these changes did nothing to stop or curb the abuse of the system. That’s received a lot of column inches in the last few weeks. I disagree. Where any reduction to the attractiveness of claims at the bottom end of the market (the huge increase in claims is largely driven by small-scale SME claims, with 18% of claims having a benefit of less than £5,000) is bound to put some of the shady advisors off. Of course, there are bound to be some “casualties” (genuine claimants that now suffer) of these measures and these are likely to be in the smaller scale entrepreneurial space and this isn’t ideal.
It’s forgetting too, though, that the main activity that is currently looking at addressing the abuses to the schemes, are the new rules being introduced for accounting periods beginning on/after 1 April 2023 (note different to the rate changes) and measures such as senior company officer sign off, disclosing your R&D advisor on your tax return and the 6 month pre-notification requirement for new claimants.
These changes are further being looked at following the recently concluded House of Lords Finance Sub-Commitee inquiry into whether or not the changes mooted will work at all, or if they go far enough (and we all enjoyed watching some of them live!). The Lords were well informed and seemed keen to explore further ways to tighten up the industry. Some sort of regulation/accreditation (having to be tax qualified to advise on a tax relief – what a concept! 😉 would remove a good number of the dodgy boutiques) and the re-opening of the specialist R&D units at HMRC would be the ones most welcome for me (instead of randomly throwing 100 new R&D inspectors at the market, that have little idea what they’re doing – and it shows in their current enquiries). I’m also still keen on my previous suggestion of a de minimis spend (£25k qualifying spend) to wash out the entire lower end of the market (removes about 20% of claims) but this didn’t seem to get mentioned in any of the House of Lords sessions.
So VERY interesting times for the R&D advisor and more to come before April 2023 (the House of Lords have said they will present their suggestions in c2 months). Watch this space. Or get in touch if you want to talk about the implications for your business.
