The Chancellor has set out in the Autumn Statement significant changes which impact the UK R&D regimes. This is all part of the government's reform of R&D credits to ensure they are effectively targeted and encourage innovation in the UK.
The changes announced today will result in a net gain to the exchequer of over £1 billion per year with large company claimants gaining and SMEs seeing a significant reduction in claims. This seems to be the first step in a government agenda to rebalance the two regimes with further consultation to come on combining the regimes, potentially resulting in an “RDEC for all” relief.
Large company RDEC changes
The RDEC headline rate will increase from 13% to 20%. This results in a change in the net cash benefit from the current 10.5% (after 19% corporation tax rate) to a cash benefit of 15% (after 25% corporation tax rate). The increased rate will apply to qualifying R&D expenditure incurred on or after 1 April 2023. This is a 42% increase in the value of claims for large companies, but is likely to be partially offset by the previously announced exclusion of overseas costs for some claimants.
SME changes
Significant changes were also announced in respect of the SME relief, with reductions to both the additional deduction rate (which will reduce from 130% to 86%), and the SME credit rate (reducing from 14.5% to 10%).
Together, these changes will mean that for loss-making SMEs the cash value of the credit will reduce from a maximum of 33% to 18.6%, and for tax paying SMEs the benefit will reduce from 24.7% to 21.5% (based on the 25% corporation tax rate).
On a positive note for SMEs that are undertaking subsidised or funded R&D, from 1 April 2023 they will be able to benefit from the increased 20% RDEC rate. The Government has also indicated that they may look at increased support for R&D intensive SMEs in the future.
Creative sector reliefs
The government has announced a number of potential changes to audio-visual tax reliefs, which include film, television and video games tax reliefs. The proposed changes include the following:
- Merging the film and television tax relief reliefs, including aligning some of the eligibility requirements, such as the cultural test.
- Amending the way that the reliefs are given, to operate in a similar way to RDEC. The intention would be to ensure that the benefit of the reliefs is preserved following the introduction of the “Pillar 2” rules.
- For video games tax relief, removing the £1m cap on eligible subcontracted spend, and restricting eligible costs to UK expenditure only (EEA spend may no longer qualify).
- For high end television tax relief, reviewing the minimum slot length and minimum expenditure requirements, and defining a ‘documentary’ in the legislation.
A consultation into the potential changes has been published, with responses due by 9 February 2023.
Other changes previously announced
The changes announced in the Autumn Statement follow other recent R&D changes that were announced earlier in the year, which are effective for accounting periods starting on or after 1 April 2023, which include:
- Process and compliance changes, including the introduction of mandatory documentation, pre-notification requirements and digital submission requirements.
- Restrictions on the eligibility of overseas labour costs.
- Expansion of the reliefs to include certain cloud computing and data acquisition costs as well as expanding the R&D definition to include pure mathematics.
In conclusion
These changes are the biggest shift in R&D tax relief policy for several years with the government seeking to reduce the differential between the two reliefs. While there are known issues with abuse in the SME market, the government seems to be using a blunt approach which does not necessarily address the underlying issues, which are likely to be better tackled through other process reforms. However, the merging of the reliefs with an “RDEC for all” relief could bring welcome simplification to the regimes providing it still appropriately rewards SME R&D intensive businesses.
If you wish to discuss further, please speak to Rachel Moore, Rohit Patiar or your usual PwC R&D specialist.