The suite of measures proposed at the dispatch box included a further change to the rate of R&D tax relief for loss-making R&D-intensive SMEs, a refocused Investment Zones programme and a new £900m AI Research Resource to develop an exascale supercomputer, aiming to bring a significant uplift in computing capacity to the AI community.
It remains to be seen whether these proposals will be enough to realise the Chancellor’s ambition of harnessing British ingenuity to achieve science and technology superpower status.
Additional tax relief for R&D-intensive loss-making SMEs
In the Autumn Statement 2022, the Chancellor announced a significant reduction in the rate of R&D tax relief for SMEs from 1 April 2023. Now he has announced that from the same date, 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 their total expenditure will be in a position to claim a payable credit rate of 14.5% for their qualifying R&D expenditure.
This support will be implemented based on a new R&D intensity definition. This definition will calculate R&D intensity as the ratio of the company’s qualifying R&D expenditure (for both the SME and RDEC schemes) for a period to its total expenditure for the same period.
Combined with the new lower enhancement rate, this results in an effective benefit of 27%, compared to up to 33% prior to 1 April 2023, or a lower benefit of 19% for other SME businesses post 1 April.
For example, if a company’s year end is 30 June 2023, the higher rate of payable credit would apply to expenditure incurred from 1 April 2023 to 30 June 2023, if the overall qualifying R&D expenditure in the year ended 30 June 2023 meets the intensity threshold.
Companies that meet this condition will be able to claim the additional support as part of their claim to SME credit, using the higher rate of credit for any expenditure on or after 1 April 2023. As this measure will be legislated retrospectively, it will not be possible to make an R&D claim for the higher rate until 1 August 2023. Companies will need to either wait until this date, or file at the lower rate and then amend their return to access the additional relief.
This proposed change will use the current tax definitions of SME, R&D and of qualifying R&D expenditure. SMEs will be eligible for this scheme for a period if they have an R&D intensity, defined as above, of 40% or above in that period.
Companies that meet this condition will be able to claim the additional support as part of their claim to SME credit, using the higher rate of credit for any expenditure on or after 1 April 2023.
For R&D-intensive companies:
- the payable credit rate will be 14.5% instead of the 10% credit rate for non-R&D-intensive companies
- the additional deduction rate will remain at 86% on top of the normal 100% tax deduction for R&D
ForrestBrown’s view on additional tax relief for R&D-intensive loss-making SMEs
While enhanced support for SMEs is welcome, the qualifying criteria introduces further complexity for businesses already struggling to make sense of the raft of reforms announced at previous fiscal events and set to come into force this April.
It is concerning that many businesses will already have put in place investment decisions based on previous changes to R&D tax relief announced at the Chancellor’s Autumn Statement. So despite a welcome respite for some businesses, this Budget is a continuation of the piecemeal changes to R&D tax policy that we’ve experienced over the past few years.
The proposed enhanced support for SMEs is a welcome move to soften the blow of last autumn’s rate reduction. However, the additional complexity for already overburdened innovative companies will be noted and for those who will not benefit from the new measure, but for whom R&D tax relief provides an important stimulus for growth it may be a bitter pill to swallow.
The higher rate only applies to loss-makers, meaning R&D-intensive SMEs making a profit may feel unfairly excluded.
There is also the potential for all of these measures to be displaced by the introduction of a new single scheme for R&D tax relief in 2024.
Delay to restrictions on overseas expenditure in R&D tax reliefs
The government has stated that “the previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief.”
This relatively well-hidden paragraph published alongside the Budget speech is confirmation that the measures to restrict R&D relief on overseas R&D activities will be delayed for a year to enable further consultation and consideration of how these rules will work alongside the proposed combined future incentive. It was encouraging to see that the government has listened to feedback, with the potential for mitigating measures to be included in the design of the new single scheme.
Read more about the changes to overseas R&D.
Higher rate for RDEC
No news was good news for companies claiming R&D Expenditure Credits (RDEC). The increase to the RDEC rate from 13% up to 20% will go ahead for expenditure incurred on or after 1 April 2023.
Read about the rate change and other key R&D tax relief changes.
Data, cloud and mathematical advances
No changes to these previously announced proposals in the Budget documents. New categories of expenditure for data sets and cloud computing services and an extension to R&D activities to include work in pure mathematics will be introduced for accounting periods beginning on or after 1 April 2023.
Read more about these changes to data and cloud costs here.
There are a number of administrative changes to the way in which R&D claims will be filed with HMRC in the future. These measures primarily impact R&D claims for periods beginning on or after 1 April 2023.
Read more about tackling abuse measures here.
Update on ongoing R&D tax reliefs review
The government’s consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes closed on 13 March 2023. You can read ForrestBrown’s response here.
The government is currently considering responses to the consultation and has stated that it intends to keep the option of implementing a merged scheme from April 2024 as a possibility. This language does suggest that it has heard the many calls from industry groups that the proposed timeline for the implementation of a single scheme does not allow for the many complexities to be properly considered.
Additionally, 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.
It has also stated that any further changes as part of the ongoing R&D tax relief review will be announced at a ‘future fiscal event.’ It has been confirmed that this will include a final decision on whether to merge the RDEC and SME schemes.
ForrestBrown’s view on the Spring Budget 2023
Today’s Budget was peppered with positive policies to encourage innovation but lacked a coherent narrative to help businesses navigate an increasingly complex tax landscape.
In our responses to the consultation process on reforming R&D tax relief, we have consistently called for a clear statement of intent from government on the purpose and scope of R&D tax reliefs, alongside a roadmap through to the end of the wider consultation. This would provide innovative businesses with the certainty they need to continue to invest in R&D with confidence and help the government to reach its goal of becoming a science and technology superpower.
By contrast, capital allowances have been simplified with the introduction of full expensing, which had been widely trailed in the media following substantial pressure from business and industry groups. A successor to the super deduction is welcome. We still lack a tangible incentive for capital investment in R&D facilities and assets.
Investment zones could also provide a catalyst for regional innovation, with the spillover effects of R&D investment widely recognised. More than seven out of ten UK companies decide where to invest in innovation based on tax incentives and grant funding, so creating a supportive ecosystem for R&D can clearly be a powerful tool for levelling up. But it is concerning that no region south of Birmingham is set to benefit.
The announcement of £20bn of support for early development of carbon capture, usage and storage (CCUS) could also be a game-changer for innovative businesses in this emerging sector – but ensuring they take an optimal approach to grant-funding and tax relief will be important to delivering the maximum benefit.
Measures to support cutting-edge sectors such as Artificial Intelligence and quantum computing with direct funding budgets are also positive. Grant funding by its nature requires the government to ‘pick winners’. It is vital that tax incentives by contrast do not become so restrictive that we risk missing the next emerging technology – whatever it might be.”
Ultimately the Chancellor’s announcement was indicative of the uncertain landscape for innovation policy development that has emerged in recent years. This sense of innovation policy chopping and changing makes future investment planning difficult and is unlikely to benefit UK plc in the long term when contrasted to comparable economies with more consistent and coherent innovation policy platforms.