A reduction in the generosity of business tax relief for SMEs announced in the Autumn Statement was not a surprise.
The SME R&D tax credits and relief scheme was already attracting criticism because of suspected fraud and general abuse of the initiative. So much so, that many other reforms are under way, as the rules have slowly been tightened up.
R&D tax credits support business investment by allowing companies to claim an enhanced Corporation Tax deduction or payable credit on their eligible R&D expenditure.
The latest reforms to the R&D scheme will become effective from April 2023. The changes for SMEs are:
- R&D costs which can be claimed are reduced to 86 per cent of qualifying expenditure, rather than 230 per cent as currently
- The available cash credit rate, which is for R&D tax losses that are offset against a cash rebate, are reduced to 10 per cent from 14.5 per cent.
For larger businesses, the Research and Development Expenditure Credit (RDEC) rate will actually increase from 13 per cent to 20 per cent
The cut comes as statistics show small businesses spent four per cent more on research and development in 2021 than they did in 2020.
Small businesses spent £24.3 billion on R&D in 2021 – four per cent more than they spent on R&D in 2020, according to the latest Office for National Statistics figures.
Businesses with up to 249 employees spent nearly £1 billion more on R&D last year than the £23.3 billion they spent in 2020. That is £4.3 billion more than they spent in 2018 – calling into question the Government’s decision to cut R&D relief for SMEs in favour of larger businesses.
By comparison, larger businesses only spent £22.6 billion on research and development last year.
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