Nearly a month has passed since the Chancellor stood at the despatch box and delivered his Autumn Statement. While the broader measures announced were focused on lowering inflation and overcoming unprecedented global headwinds, significant adjustments to rates of R&D tax relief were also introduced.
This blog is intended as a follow up to an earlier post which outlines the upcoming changes in detail – including rate changes – as well as providing valuable insight from ForrestBrown Director and Head of Policy Jenny Tragner on their impact.
To help expand further on the detail following the Chancellor’s announcement, we compiled a list of Frequently Asked Questions on the changes to R&D tax relief as part of the Autumn Statement 2022.
What is the overall impact of Autumn Statement?
According to the Office for Budget Responsibility (OBR) the measures announced in the Chancellor’s Autumn Statement (specifically the changes to the rates) will have “no detrimental effect” on the level of R&D investment in the economy.
But changes to the SME rate will hit the smallest hardest and R&D intensive high-tech start-ups may feel unfairly hit at a time when protecting and growing R&D investment is particularly challenging.
Additionally, introducing a further suite of changes increases complexity for all businesses accessing relief and a lack of certainty could have a detrimental impact on investment decision-making.
The good news is that the Chancellor’s acceptance of the importance of R&D tax incentives is explicit, and demonstrates the mainstream view, in that R&D tax credits play a vital part in the innovation landscape and wider economic growth.
At ForrestBrown we will continue help shape the future of the incentive, working with government on the ongoing reforms and consulting on improving standards in the R&D tax market.
If these changes will have a significant impact on your future R&D investment, it is important that your views are represented to inform any further reforms to the relief. You can do this by getting in touch with the team at ForrestBrown, or by contributing directly to the consultation.
What does ‘These changes are due to come into force for expenditure incurred on or after 1 April 2023’ mean?
This means that if your company prepares accounts to 31 March each year, all of the expenditure you incur in the year to 31 March 2024 will be subject to the new rates of relief (as this period will include expenditure incurred from 1 April 2023 to 31 March 2024). Note that this period will also be the first in which the new rules for data, cloud and overseas R&D apply (as these start for accounting periods beginning on or after 1 April 2023).
If you prepare accounts to a different date, you will need to apportion your expenditure and apply the current and new rates accordingly. For example, for the year to 31 December 2023, expenditure incurred between 1 January 2023 and 31 March 2023 will attract relief at the current rates. Expenditure incurred between 1 April 2023 and 31 December 2023 will be subject to the new rates. Unlike for a March year end business, for a company making up accounts to December each year, the first period affected by the changes to data, cloud and overseas R&D will by the year ended 31 December 2024 (because this is the first period which starts after 1 April 2023).
The consultation is ongoing – what other changes might we see in the future?
There are some further areas where changes are expected soon:
RDEC for all
The rebalancing of rates represents an important step towards a simplified, single RDEC-like relief for all businesses, replacing the two schemes we have at the moment.
This is something ForrestBrown has long advocated for, albeit not along with a lower rate of generosity for R&D intensive SMEs.
This move will simplify the relief overall, and RDEC offers greater certainty and visibility, providing clearer benefits to business decision-making.
HM Treasury plan to consult with industry on this matter in the coming weeks, and we expect further announcements at Budget 2023.
Support for R&D intensive SMEs
The government is also seeking views on how to better support R&D intensive SMEs, responding to criticism that innovative start-ups and scale-ups risk being collateral damage in the rate rebalancing.
HMRC will be given further resources and investment for a continued focus on compliance work. We are hoping that this includes substantial investment in training new staff to carry out checks consistently and efficiently.
There were also a few other areas which were included in the original consultation document, including tax reliefs for capital R&D expenditure and regional distribution of R&D activities, but not much has been said by government on these in recent times.
Can a company choose which scheme they claim under?
No. However, deciding which scheme to claim under is not as simple as just assessing whether you are a large or small business. You need to take into account group structure and some other debt/equity relationships with other enterprises. In addition, contractual relationships with clients and other funding of R&D expenditure can impact which scheme you should access.
Currently for the vast majority of SMEs, the SME scheme is still more generous than RDEC, particularly as it also includes a wider cost base as qualifying expenditure.
Will we see further reduction in the generosity of the SME scheme?
The rebalancing of the rates of relief is explicitly a step towards a single scheme, so it does seem likely that the new single scheme will be at one rate of relief.
Whether that means a further reduction in generosity for SMEs, or a further increase in generosity for RDEC is not yet clear.
However, a number of business groups, academics and industry associations have criticised the move to reduce relief for SMEs, so there will be substantial pressure on the Chancellor not to implement further reductions.
One thing we do expect to see potentially are changes to ensure that only genuine R&D projects receive relief. What is meant by genuine R&D is still being discussed, but we’ve seen examples in the press which have been widely condemned as not the sort of projects the funding should be going towards
Why is the government looking to move the SME scheme onto the RDEC model?
The key difference between the two schemes is the calculation of the relief or credit. For SME relief, we have two elements – enhancement of R&D expenditure which reduces taxable profits, then the option of surrendering losses for a payable credit.
This mechanism creates lots of complexities in some cases and results in a benefit rate which fluctuates depending on the wider tax position of the company. For example, if you are a pre-revenue SME investing substantial sums in developing a product for commercialisation, you may be used to receiving a generous cash credit of 33% of your R&D spend.
In the first year you make a small profit, you’re likely to see this benefit rate drop, potentially all the way down to 19% even if your R&D expenditure is stable, because of the interaction between the relief mechanism and the company’s tax position.
RDEC is more recently designed and designed in part specifically to avoid this complexity. It offers a credit which is a percentage of R&D expenditure. You can then use that credit to offset your tax liability, or if there isn’t one, receive it as cash.
That way, you receive a stable benefit rate which is proportionate to your R&D expenditure regardless of your wider tax position.
This is the driver behind selecting this as the preferred structure for the relief going forwards.
If you’re not familiar with RDEC, the change from one calculation to another might seem like added complexity, but the simplicity of the RDEC calculation should offset this to a degree.
The future of R&D tax relief
ForrestBrown continues to be closely involved in the ongoing discussions, providing detailed responses and recommendations to government on behalf of our clients and working with a number of other key stakeholders to help shape the future of the incentive.
- Throughout this process, we have called for a review of the definition of R&D, to make it clearer and more accessible to R&D businesses, with better guidance and examples.
- Simplification and streamlining of the rules to reduce errors and disagreements.
- And better regulation of the tax advice market to protect businesses seeking advice on R&D tax relief.
We remain committed to these priorities.