Following concerns that the SME R&D Tax relief scheme is not delivering the anticipated benefits, the chancellor has announced a reduction of over 33% to the benefit rate.
For expenditure incurred on or after 1st April 2023, SMEs or Small & Medium sized Entities, will now be able to claim an enhanced deduction of 86% (instead of the current 130%) on qualifying R&D expenditure.
The cash-back rate for loss-making companies has also been reduced to 10% from the current 14.5%.
For SMEs paying tax at 19%, the additional benefit will reduce from 24.7% to 16.34%. At a tax rate of 25% the additional benefit will be 21.5%.
For loss-making SMEs claiming cash back, the rate will reduce from the current 33.35% on qualifying R&D expenditure to 18.6%.
In contrast, for non-SMEs or large companies, the R&D Expenditure Credit (RDEC) rate will be increased to 20% from the current 13%. As the credit is taxable, the net benefit (after tax of 25% from 1st April 2023) will be 15% compared to the current 10.53% (after current tax rate of 19%).
Today’s changes show that the government’s focus is on the large company RDEC scheme, where the return on investment is much higher than the SME scheme.
The SME rate reduction will be disappointing for genuine claimants and in particular, micro-businesses who rely on this funding for their R&D investment.
It will be interesting to see whether, with the rate decrease, will the smaller SMEs attempt to submit claims themselves, rather than use advisers for this purpose? Will this result in more incorrect claims being submitted, or will they give up on making claims altogether, potentially impacting UK innovation, of which they are a key part?
Only time will tell.