R&D tax relief reforms to hit smaller firms

Loss-making small or medium-sized enterprises (SMEs) can currently claim a 14.5% payable tax credit on qualifying research and development (R&D) expenditure, but this rate will be cut to 10% from 1 April 2023. This cut is part of a larger programme of changes.

Payable tax credit – A loss-making SME can surrender a trading loss in return for a tax credit. This cash repayment can be a vital source of funds for start-ups. From 1 April 2023, the amount that can be surrendered will be the lower of:

• the amount of unrelieved trading loss for a period; and
• 186% of the qualifying R&D expenditure (this percentage being currently 230%).

For example, an SME spending £100,000 on qualifying R&D will treat this as if they have spent £186,000. Sufficient unrelieved trading loss allows the £186,000 to be surrendered for a cash repayment of £18,600, substantially less than the £33,350 currently repaid.

R&D relief – Profitable SMEs can claim an additional deduction for qualifying R&D expenditure. From 1 April 2023, the rate of additional deduction is reduced from 130% to 86%. Along with the normal 100% deduction for the R&D expenditure, this will mean a total 186% deduction. Although the rate has been reduced, the tax saving will generally increase next year.

• The current tax saving on qualifying expenditure of £100,000, with a corporation tax rate of 19%, is £43,700.
• Next year, with a corporation tax rate of 25%, the saving works out at £46,500.

R&D expenditure credit – The RDEC is primarily aimed at larger companies, but can also be claimed by SMEs in some circumstances. The rate of this standalone credit is to be increased from 13% to 20%. Since the credit is taxable, it will be worth £15,000 for every £100,000 spent on R&D assuming main rate corporation tax applies.