Successive Budget announcements over recent years have included changes to, or consultations into, the R&D regime. With a continued focus on making our tax regime competitive, Wednesday’s was no different. There were two key R&D measures: an additional tax relief for R&D intensive SMEs and a delay to overseas expenditure relief restrictions.
R&D intensive SMEs
This latest change targets R&D intensive, loss-making SMEs, where ‘R&D intensive’ means qualifying R&D expenditure makes up 40% or more of total expenditure. Eligible companies will be able to claim £27 for every £100 spent on R&D from 1 April 2023. The rate of relief is derived by giving an enhanced deduction at the new rate of 186% of the original expense, and applying a 14.5% tax credit rate.
By comparison, under the existing regime amended in the November 2022 Autumn Statement, a loss-making SME can claim 186% of the original expense which may be surrendered for a lower 10% R&D tax credit. This generates an effective subsidy of 18.6% from 1 April 2023.
It’s expected that the sectors most likely to benefit from this are digital-based technology, pharmaceuticals, and early stage manufacturing.
To claim R&D under the SME regime you must have fewer than 500 staff and a turnover of under €100m or a balance sheet total under €86m. As with many areas of UK tax thresholds, this is still defined by EC regulations.
The test is not as simple to apply as it may seem. It’s extended to cover the figures of any connected and partner companies, which means you must bring into your calculations either the full figures of that company or a percentage of them. Beware, also, if you receive notifiable state aid for your project or if you have the work subsidised. These block the SME relief and move you to the less favourable R&D expenditure credit (RDEC) regime.
Overseas expenditure reliefs
Draft legislation had been published to restrict the ability to claim overseas expenditure relief in R&D claims with effect from 1 April 2023. This extended to both overseas subcontractor and externally provided worker costs.
But the legislation has now been delayed until 1 April 2024, to allow the Government to consider the impact it will have on a potentially merged R&D relief scheme (combining the RDEC and SME schemes). The consultation closed earlier this month and we await the outcome.
It’s clear that with all the changes under the R&D regime, and those likely still to come, it is more important than ever to seek appropriate advice and to ensure your R&D claims are accurate and robust.
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