In the Autumn Statement on November 17th, the chancellor announced some significant changes to R&D tax credits and what you can claim.
The short version is that from April 2023, the R&D tax credits are less generous.
What has been announced From 1st April 2023, the credit you get for R&D expenditure, such as salaries, subcontractors and software, will have reduced rates. The 130% extra deduction you currently receive will reduce to 86% and the R&D tax credit will decrease from 14.5% to 10%.
For larger companies who claim under the R&D RDEC scheme (as opposed to the regular R&D SME scheme) or SME companies who have grant funding spent on R&D activities, the credit will increase from 13% to 20%.
Some of the previously mentioned changes, such as hosting costs being allowed expenditure, only UK subcontractors being included and increasing the compliance administration, has been put on hold until 2024.
When do these changes take effect? These changes take effect from 1st April 2023 on any expenditure made on or after this date. Previous rules apply for any expenditure made prior to the aforementioned date.
Who does this impact? Every business that claims R&D tax credits is affected by these changes.
How these changes affect your business will depend on the level of profits, because the Corporation Tax rate is also rising to 25% for those companies with taxable profits above £250,000.
Loss making (or pre-revenue) businesses For loss making businesses or those in the development stage before starting to trade, these changes will negatively affect cashflow.
As an example, for a business with R&D expenditure of £50,000, in the current year, you would currently receive £16,675, from next year, this will be £9,300. This means that for every £100 spent on R&D, the maximum tax credit will be £18.60 (currently: £33.35).
Businesses with profits less than £50,000 Businesses with profits under £50,000 will see the biggest impact from these changes. Currently, your tax relief on R&D expenditure of £50,000 is £12,350, from next year, it will be £8,170. This means that for every £100 spent on R&D, you will receive £16.34 in additional tax relief (currently: £24.70).
Profits between £50,000 and £250,000 For businesses with profits over £50,000 but under £250,000, the Corporation Tax rate will be tapered between 19% and 25%, therefore the additional R&D tax relief received will vary depending on this rate. For every £100 spent on R&D, you will receive between £16.34 and £21.50 in additional tax relief (currently: £24.70).
Businesses with profits over £250,000 For businesses with profits over £250,000, the Corporation Tax rate will be 25%. However, with the R&D rate reducing from 130% to 86%, they are worse off than before. For example, with £50,000 R&D expenditure, you will receive £10,750 of relief (currently: £12,350). Meaning for every £100 spent on R&D, you will receive £21.50 in additional tax relief (currently: £24.70).
What you can do?
R&D is calculated on a cash basis, so if you can bring forward any expenditure that relates to R&D into this year, that will be more tax efficient. What upcoming expenditure do you have? Bonuses, employer pension contributions, paying your R&D subcontractors and software costs relating to R&D?
Loss making businesses will be the worst hit by these changes. One option to consider is to shorten the company year ends to March 2023 to accelerate tax relief at the current (higher) rate.
From 2024, only UK subcontractor costs will qualify. It is worth planning this year how to manage any overseas subcontractors you have.
If you'd like to chat this through, book a call with me and I will be happy to help and advise.