R&D tax credit cash-back reduced

by | Nov 18, 2022 | Commentary and opinion, Tax

There were some surprises for Small and Medium Enterprises using the Research and Development Tax credit scheme. The Chancellor announced that the benefit will be cut from 1 April 2023, with the additional 130% tax deduction reduced to just 86%. With the tax increase from 19% to 25% from the same date, this may explain this change, since for tax paying companies, the effective rate of tax saved is 43.7% now but will be 46.5% then.

There is a more marked difference for the many smaller and pre-revenue companies using the cash-back option, with the cash-back rate reduced from 14.5% to 10%, which is equivalent to 18.6p in the pound, rather than 33p.

R&D tax credits have been subject to recent consultation, with some changes expected to come in from April 2023 in any event. These will place restrictions on qualifying staff costs where the people are based outside of the UK, whilst extending the rules to bring in costs of data and cloud computing. In parallel, the government are aware that there has been an increase in the number of SME claims that are erroneous or fraudulent and this measure is part of their commitment “to ensure taxpayers’ money is spent as effectively as possible”

The Research and Development Expenditure Credit (RDEC) scheme, mainly used by large companies but sometimes also used by SMEs, will be made more generous, with the rate increasing to 20% from 13%. There is no cash-back option here and the government have stated that they will consult further in this area on the design of a single scheme.

Wider support for innovation was announced with the news that Investment Zones will be refocussed on “high potential clusters” led by the Department for Levelling Up. This measure from the ill-fated mini-Budget survives, but in a significantly more focussed form.

Although no details are mentioned, the Autumn Statement confirms that the government remains supportive of Enterprise Investment Schemes and Venture Capital Trusts, and there is a tentative suggestion they could be extended.

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