Changes to SME R&D tax relief

One of the biggest surprises to come from the Autumn Budget was the slashing of Research and Development (R&D) tax relief. While a reduction in relief was expected, the size of the cuts have raised a question mark over SME innovation going forward.

In the weeks leading up to the Budget, there was increased focus on fraud and abuse within the R&D industry.

A number of articles from The Times highlighted questionable R&D claims for things like installing bike sheds or designing a vegan menu. Additionally, a Lords committee was convened to question R&D advisory companies on the importance of relief to businesses and the likely effectiveness of government proposals to tackle abuse.

This noise pointed towards Chancellor Jeremy Hunt making changes in the Budget, which he issued last week.

So, what practical steps can you take to mitigate the financial impact of Budget changes, whether you run a business or are concerned about personal savings? We break it down to help you.

Previously, the SME R&D tax relief allowed companies to deduct an extra 130% of their qualifying costs from their yearly profit. Companies could also claim a tax credit if the company was loss making, worth up to 14.5% of the surrenderable loss.

Jonathan Scott, Tax Partner at Haines Watts, speculated that the Budget could cut additional relief back down to 100%, as it was between 2008 and 2011. However, the Chancellor cut the deduction rate for the SME scheme to 86% and the credit rate to 10%.

“If he’d reduced the rate to 100%, we would still have had the status quo going into 2023. But he’s gone to 86%, so there’s a dip in terms of the relief that SMEs will get. He went further than I expected by reducing payable tax credits – dropping from 14 to 10% is huge. It can be the difference in whether R&D projects make it to fruition,” Jonathan said.

Conversely, the Chancellor increased the rate of the separate R&D expenditure credit (RDEC) from 13% to 20%.

“The RDEC scheme is for large businesses which have over 500 staff. He could have kept the RDEC where it was, but to increase it is a massive jump. It went from 11 to 12% in 2017, then 12 to 13% in 2020. Now it’s gone from 13 to 20%,” Jonathan added.

The new changes will be particularly hard to swallow for small and medium-sized firms midway through R&D projects.

“There are payable tax credits from HMRC that they have not yet paid. It’s a cash inflow that businesses would’ve banked on at the start of the project,” Jonathan said. “That not being there anymore could be the difference between projects finishing and not finishing.

“Perversely, the businesses that need it most, which are grant funded and newly formed businesses with no income yet, have been hit by a reduction in relief. We know there’s a Covid bill to pay, but they should have kept it on par with what we’re currently on.”

The changes also markedly contrast with previous announcements. The government has sought to portray the UK as a global innovation hub; cutting the rates and returns for small and medium innovators flies in the face of that ambition.

For those worried about the impact of the changes, Jonathan recommends taking a close look at your financial plans.

“It will be a case of getting your cash flow modelling done early and doing your forecasts for tax provisions. With the reduction in the personal allowance rate, there are lots of little parts that, when combined, could topple a business.”

Need support navigating the new rules? The Haines Watts team is here to help. Get in touch with us here

Getting advice on how to cope with the Budget changes

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