Spring Budget 2023: Research and Development (R&D)

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The government has previously stated its intention to reform the tax relief that is provided to companies undertaking R&D and, in line with the last few fiscal events (Budgets and Autumn Statements), the Chancellor has added yet more changes to the relief for small and medium (“SME”) sized companies.

To recap the changes that were already scheduled to come in from 1 April 2023:

• The Research and Development Expenditure Credit (RDEC) for large companies would increase from 13% of qualifying expenditure to 20%;
• The enhanced deduction which SMEs could claim for qualifying R&D expenditure would reduce from 130% to 86%;
• The SME tax credit would reduce from 14.5% to 10% (the rate at which a company receives a repayable tax credit if the company surrenders losses which have been created by qualifying R&D expenditure); and
• Restrictions would be introduced regarding the amount of overseas expenditure that could be included in R&D tax relief claims.

As can be seen from the above, the general direction of travel has been to reduce the amount of tax relief available for SMEs, but to make the relief more attractive for large companies.  This has looked to have primarily been driven by the government’s concern that the SME scheme has historically been abused, and there is therefore a need to do something to address the issues.  There is continued thought that the SME regime may be merged with the large company scheme at some point in the future, however, for the moment, the two schemes will continue to operate in parallel.

In terms of changes that were announced during the Budget:

• The restrictions on the amount of overseas expenditure that can be included in R&D tax relief claims will be delayed until 1 April 2024; and
• For SMEs who are heavily involved in R&D, the repayable tax credit will remain at 14.5% rather than the reduced 10%.  For these purposes, a company that is heavily involved in R&D is defined as one where 40% of its “total expenditure” is incurred on qualifying R&D activities.

The Chancellor framed the second announcement as a generous additional relief, however, it is important to understand that:

• The repayable tax credit is only available to companies that have a loss which they surrender to HMRC;
• Under the current rules (which end on 31 March 2023), companies spending £100 on R&D, can obtain a repayable tax credit of £33.35;
• Under the new rules, companies heavily involved in R&D spending that same £100 on R&D will only receive a repayable tax credit of £26.97 by virtue of the reduced enhanced deduction – a loss of £6.38 for every £100 spent on R&D;
• However, this is still better than SME companies who don’t qualify for the additional credit available to companies heavily involved in R&D.  For these companies, £100 spent on R&D would equate to a repayable tax credit of £18.60, meaning those companies will be £14,75 worse off than under the current regime.    

As with many announcements by Chancellors, what appears to be a generous increase in the amount of tax relief available, is actually a reduction when a real comparison is made.