Changes to the UK's R&D tax credit scheme

Changes to the UK's R&D tax credit scheme

The 2022 Autumn Statement, delivered by Chancellor Jeremy Hunt on 17 November, has resulted in some notable changes to the UK R&D tax credit scheme. And many are arguing that the changes may end up being detrimental to innovation’s progress among SMEs in particular. These latest modifications are in addition to a number of other legislative changes, which were announced earlier this year, in a bid to reduce fraudulent claims.


Research and Development Expenditure Credit


To start with the good news, the Research and Development Expenditure Credit (RDEC) scheme – which is predominantly used by larger firms – will see the rate rise from 13% to 20% of qualifying R&D expenditure incurred on or after 1 April 2023. This is, in effect, a taxable credit which may be used to offset liability to UK corporation tax.


However, the RDEC is not as valuable to start-ups – it tends to be used by larger businesses that are less reliant on a cash injection to drive forward its research efforts.


It is widely believed that this RDEC change demonstrates a drive to support more R&D within larger UK businesses, which is somewhat at odds with the original rationale to throw more support behind SMEs to help them build a long-term plan.


SME ‘enhanced deduction’ and cash tax credit


With support tipped in favour of larger companies came an unfortunate scaling back of support for R&D tax credits for SMEs. The ‘enhanced deduction’ available to SMEs of 130% of qualifying R&D expenditure has been reduced to 86% and payable cash tax credit has been cut from 14.5% to 10%.


The reduced 10% cash tax credit available to SMEs is calculated on the basis of the reduced 86% ‘enhanced deduction’ (rather than 14.5% of a 130% ‘enhanced deduction’).


Why have these changes been made?


Aside from the primary aim to reduce the government’s ‘fiscal black hole’, there are two other likely drivers behind the changes.


Firstly, the UK’s R&D tax credit scheme has been generous, in comparison to most other countries. This rate reduction brings the country more in line with the rest of the world.

Secondly, there is the undeniable fact that the ability to claim back large sums has made the scheme an easy target for abuse and fraud, something which has been highlighted in the media in recent weeks.  The UK government is also due to introduce new anti-abuse measures from April 2023, and it is disappointing that they did not want to wait and see what difference this made, before introducing these additional cuts.


Jeremy Hunt has, however, reiterated the UK Government’s commitment to public spending of £20bn on R&D by 2024-5. This should enable the UK to hit its target of UK R&D expenditure reaching 2.4% of GDP by 2027.