Chancellor Jeremy Hunt’s Autumn Statement proposed a plan to address the cost of living crisis and repair the UK economy, with a stated focus on stability, growth and public services.
While both deep spending cuts and tax rises were announced, he also openly declared his intention to protect the Research and Development budget and explained how he is aiming to increase the R&D budget to £20bn by 2024/25.
However, while the overall R&D budget survived unscathed, Hunt did announce changes to both the SME and RDEC schemes.
Our Head of Tax, Jon Yeomans has reviewed the supporting documents and highlighted 5 key changes that will materially affect the R&D tax scheme. He’ll dig into these in detail in our Autumn Statement R&D Debrief webinar on 24 November – but here are the headlines:
1/ The government will invest £20bn in R&D by 2024/25
Despite vast spending cuts across the board, Hunt announced the government’s continued support for boosting innovation in today’s Statement, stating that it would be a ‘profound mistake to cut back, or cap the UK’s Research and Development budget’.
Public spending on R&D will increase to £20 billion a year by 2024/25, which is almost 33% more compared to 2021-22. This is the biggest increase in R&D spend ever during a Spending Review period.
2/ Reforms to the SME Tax Relief Scheme
It’s no secret there has been an increase in error and fraud in the Small and Medium-sized Enterprise (SME) scheme in recent years. The government has implemented extra measures to fight fraud and abuse, including an anti-abuse task force and increased checks.
However, the government has concluded that even more needs to be done. With that in mind, Chancellor Hunt announced today that the enhanced R&D expenditure rate for SMEs would decrease from 130% to 86%, and the SME tax credit rate will reduce from 14.5% to 10%.
For profitable SMEs, this means that when the 25% rate kicks in, the effective net tax benefit of R&D tax relief will reduce from 24.7% to 21.5% – and for loss-making SMEs taking a tax credit, the net benefit will change from the current level of 33.35% to 18.6%.
It’s perhaps too early to make concrete projections, but we believe this change could result in many more businesses choosing to carry forward losses rather than take R&D tax credits in future.
These changes will be included in the Autumn Finance Bill 2022 to be effective for R&D expenditure after 1 April 2023.
3/ Reforms to the Research and Development Expenditure Credit (RDEC) Scheme
In contrast, the government believes that the separate RDEC scheme drives better economic value than the SME scheme. However, it admits that the RDEC scheme’s rate is not as internationally competitive.
These changes will also be included in the Autumn Finance Bill 2022.
4/ Potential move towards a single RDEC scheme
Of course, the government has hinted that it will consult with the R&D tax industry on how this might look before making any final decisions. As usual, EmpowerRD look forward to contributing our thoughts to any consultation about further reforms in this area.
As previously announced in Autumn Budget 2021 and the Spring Statement, 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 included in the Spring Finance Bill 2023.
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