The Government seemed to back up their statement that they want to strengthen the UK’s position as a global science and technology power, but from their recent budget announcements, this was less evident.
In particular, from 1st April 2023 the R&D enhancement for SME’s was due to drop from 130% to 86% and the repayable tax credit was due to drop from 14.5% to 10%. As well as this, for accounting periods starting on or after 1st April 2023 there was a going to be a significant restriction in overseas costs, a real issue for those using cheap overseas labour for example software developers.
It seems that recent pressure from the Federations of Small Businesses (FSB) in which they have lobbied the government to reverse the recent R&D tax overhaul and tax measures have had some impact. They were quoted as saying that the UK would become an “innovation wasteland” and the changes would “significantly damage the UK’s start-up ecosystem”.
Although todays Budget did not reverse the previous reductions, there was at least some very good news for SME’s, in particular with the following announcements:
Additional Tax Relief
Additional tax relief for R&D intensive SMEs – From 1st April 2023, a higher rate of relief for loss-making R&D intensive SMEs will be introduced. SME companies for which qualifying R&D expenditure constitutes at least 40% of total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying R&D expenditure.
Overseas expenditure in R&D tax reliefs
Delay to restrictions on overseas expenditure in R&D tax reliefs – The previously announced restriction on some overseas expenditure will now come into effect from 1st April 2024 instead of 1st April 2023. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief.
Ongoing R&D Tax Relief Review
The government’s consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes closed on 13th March. The government is currently considering the responses and no decision has been made. The government intends to keep open the option of implementing a merged scheme from April 2024.
The government will publish draft legislation on a merged scheme for technical consultation alongside the publication of the draft Finance Bill in the summer, with a summary of responses to the consultation. Any further changes as a part of the ongoing R&D tax reliefs review will be announced at a future fiscal event, including a final decision on whether to merge the RDEC and SME schemes.
The above means that certain qualifying companies (R&D intensive and most likely loss making) will now get an R&D tax credit of up to 27% compared with the 18.6% they would have been getting if no announcement had been made, which is still not as good as the 33.35% they were getting previously.
Claiming on overseas R&D Expenditure
It would appear companies can also continue to claim overseas R&D expenditure, at least for another year or two with the new rules pushed a year down the road.
The announcements above will be massive for SME’s carrying significant R&D, especially in the tech and start up world.
If you have any questions regarding the recent spring budget announcement and R&D, please contact our R&D Team, or contact us via the form below:
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