In what feels like an everchanging landscape of UK tax relief on research and development (R&D) expenditure, Chancellor Jeremy Hunt in his Spring Budget 2023 announced further reforms to the UK R&D tax relief regime and hinted at the UK Government’s approach to how R&D tax relief in the UK may change in the coming years.
Support for R&D Intensive SMEs
The major announcement coming out of the Spring Budget was a brand-new R&D tax credit scheme, specifically targeted at loss-making SMEs in the UK. With effect from 1 April 2023, loss-making SMEs which are also “R&D intensive” (defined as a company where the qualifying R&D expenditure is at least 40% of that company’s total expenditure) will be entitled to claim £27, in the form of a cash tax credit from HMRC, for every £100 of qualifying R&D expenditure. That is compared to the current R&D tax relief rules applicable to SMEs generally which effectively entitle loss-making SMEs to claim only £18.60 for every £100 of qualifying R&D expenditure (though, that entitlement does not come with the “R&D intensive” string attached). The relatively smaller £18.60 entitlement is a result of the UK Government’s scaling back of the cash tax credit rates for SMEs announced in November 2022 (which I discussed here).
The supporting documents published alongside the Spring Budget indicate that the UK Government believes that this will benefit UK SMEs across several sectors (including life sciences, computer programming and manufacturing).
Whether this will, indeed, have a meaningful positive effect on business activity or R&D investment is yet to be seen. The language used in the UK Government’s 2023 consultation on the R&D tax relief regime was generally pessimistic around the ability of tax incentives to spur R&D investment by SMEs which was in contrast to the more upbeat language used in respect of large companies.
Change in R&D Strategy?
I discussed in November that the UK Government refocussed its R&D strategy away from SMEs and towards large companies. The motivations for that change in strategy became clear from the UK Government’s 2023 consultation document (generally on the basis that there is better value for money in spending taxpayer funds on encouraging large companies to spend on R&D, the scale of that expenditure is larger in aggregate and that it is becoming increasingly difficult to manage fraud and error in respect of the SME R&D relief scheme).
That strategy seems to remain in place for now. The UK Government confirmed that the increase from 13% to 20% for the Research and Development Expenditure Credit (the “RDEC” which is generally the R&D tax relief scheme for large companies) is “permanent” (though you may wonder why the Chancellor failed to take the opportunity to further tune the RDEC for the benefit of large companies).
One might also wonder whether this increased show of support for SMEs hints at a shift in focus to a more balanced approach to R&D tax reliefs in the UK. In my view, the answer is that it does not.
Following the November 2022 rate changes, there were calls for the Chancellor to undo the scaling back of the SME R&D scheme. Instead, what the Chancellor seems to have done is introduce the new tax credit as a direct result of the November 2022 rate changes. As the budget materials point out, the new tax credit announced in this Spring Budget is to support “those most impacted by the rate changes introduced at Autumn Statement 2022”. This new tax credit, therefore, gives the impression of damage control rather than active support and indicates that there is no appetite to undo the scaling back of the SME scheme (much to the disappointment of SMEs hoping to benefit from some broader respite as part of this spending package).
Looking Forward (and back)
Going forward, all eyes will be on the UK Government’s response to the 2023 consultation on merging the RDEC and the SME R&D tax relief schemes. The period for responses closed on 13 March 2023 and the UK Government “intends to keep open the option of implementing a merged scheme from April 2024”. As the UK Government noted in the consultation document, it will actively explore how best to mitigate any adverse impact suffered by SMEs as a result of the transition to a single merged R&D tax relief scheme (perhaps this new tax credit will form part of that transition planning).
Looking back to 2022 for a moment, the UK Government announced certain changes to the UK R&D tax regime (some of which I discussed here) in July 2022. One of the bigger changes was the general restriction on claiming UK R&D tax reliefs on non-UK R&D expenditure. This was intended to take effect from 1 April 2023 but has now been delayed until 1 April 2024 so that the UK Government may assess the interaction between such a restriction and a possible merging of the RDEC and the SME R&D tax relief schemes. Interestingly, however, the other changes announced in July 2022 (the expansion of UK R&D tax relief to include cloud computing and data costs being specifically mentioned in the Spring Budget materials) are still intended to come into effect on 1 April 2023.
It is becoming somewhat trite to say that there will indeed be further changes to the UK R&D tax relief regimes. In my previous blog post, I mentioned that the R&D regime was “on [the Treasury’s] radar”. It now seems like, for the coming years at least, it will not be leaving that radar.