Autumn statement 2022: Large companies benefit most from R&D changes
The Chancellor’s Autumn Statement made a number of announcements relating to changes to the existing R&D tax regime. This was a mixture of good news for large companies and not so good news for small and medium-sized enterprises (SMEs).The changes are expected to come in for expenditure incurred on or after 1 April 2023.
For large companies or SMEs undertaking subsidised projects claiming the R&D Expenditure Credit (RDEC), the RDEC rate will increase from 13% to 20%. Even with the increase in corporation tax the net RDEC benefit will increase from 10.53% to 15%. This is extremely good news for RDEC claimants that continue to invest in R&D activities and help to increase economic growth in the UK.
Less positive is the impact of today’s announcements on SMEs, particularly those most in need of support. The changes will result in the current enhanced deduction decreasing from 130% to 86% and for loss-making SMEs the R&D tax credit will decrease from 14.5% to 10%. This potentially decreases the benefit for loss-making SMEs from 33% to 18%, almost halving the credit available. Feedback from our clients and the wider industry to recent Government consultations make it clear that the SME R&D tax relief scheme plays a significant role in increasing investment in R&D by UK companies and enhancing our competitiveness in an increasingly global market. For example, the UK is one of the leading FinTech hubs globally, with the majority of these companies being classed as SMEs for R&D tax purposes. Many of these companies operate in a highly competitive global environment, building innovative solutions for the financial services industry. The proposed changes to the SME tax regime are a blow for these companies and the majority of SMEs that make genuine R&D tax claims. The significantly reduced benefit will negatively impact their ability to continue to invest and grow their businesses. This coupled with the proposed restrictions to overseas staff may result in companies considering moving their operations abroad where more generous tax incentives are available. This appears to conflict with the original ethos of the regime, that is to promote growth in the UK’s economy.
As well as the pressure to reduce public expenditure, the key motivation for the reduction in the SME R&D tax benefit is the abuse and error in the regime, which HMRC and the Government believe is most prevalent in SME claims. The changes are, however, a rather blunt instrument that will negatively impact genuine claimants rather than tackle abuse.
The Government plan to consult on the design of a single RDEC-like scheme for all companies. We trust that the Government will seriously consider recommendations from industry on how to tackle abuse of the scheme and to reduce the number of spurious claims through a more targeted and effective review and improved guidance. Once the above changes have been implemented, we hope the Government will be in position to reverse this decrease in the support for the SME sector, a key contributor of growth to the UK economy.
Autumn Statement 2022
Analysis and commentary from the experts at Evelyn Partners, identifying the key tax changes and outlining the practical implications for you and your business.