In Chancellor Jeremy Hunt’s November statement, major changes were announced to the SME R&D Tax Relief and the Research and Development Expenditure Credit (RDEC).
In summary, Hunt announced that for expenditure on or after 1 April 2023, the R&D Expenditure Credit (RDEC) rate for large companies will increase from 13% to 20%, but the SME additional deduction will decrease from 130% to 86%.
Furthermore, the SME credit rate will decrease from 14.5% to 10%.
The government will also eventually consult on the design of a single scheme.
Why have these changes been introduced?
It appears Hunt is seeking to make the UK RDEC regime more internationally competitive, whilst controlling the overall costs of the R&D tax incentives with the new measures.
There have been concerns that the SME regime has been abused and/or errors made. Therefore, the reduction in the benefits under the scheme may be a means to control costs.
The government’s confidence in the scheme has been impacted over several years by a significant rise in the number of fraudulent and abusive claims.
HMRC estimates that fraudulent claims cost the exchequer close to £500 million in the 2020-21 tax year.
The number of abusive claims is difficult to measure but it is likely they have increased in recent years, due in part to the actions of a growing number of unscrupulous R&D tax credit agencies, as well as businesses that inflate their own claims.
As discussed, the government has discussed its intention to move towards a single simplified RDEC regime and to look at providing additional incentives to R&D intensive SME companies.
Therefore, it is likely that there will be further changes to the R&D incentives introduced in the future.
Will the changes reduce fraud?
The RDEC scheme is designed to be less vulnerable to abuse, partly because it does not provide relief on subcontractor costs.
Therefore, by redirecting funding from the SME scheme to RDEC, the government is hoping to stimulate innovation while protecting public funds.
While a good idea in theory, cutting SME R&D tax relief may not deter abuse in the way it is hoped it will.
Unfortunately, it’s possible that, in the short term, cases of fraud may even increase as companies look to exploit the higher relief before it is decreased.
Furthermore, the cuts risk reducing innovation among SMEs. These organisations contribute billions to our economy and limiting the technology sector’s ability to innovate may result in pausing or reducing potential growth.
How will this impact my claim?
Whether you are applying for the SME scheme, RDEC, or a combination of both, the challenge ahead is to make the most of the upcoming changes.
If you think SME R&D tax relief is the best scheme for you, this will mean maximising your expenditure between now and 1 April 2023.
You can do this with Advance Funding or by capitalising on other forms of government funding, such as innovation grants.
However, if you are looking to file for RDEC, this will mean working with an R&D expert that can help you capitalise on the scheme’s new generosity by ensuring you are claiming for all your eligible expenditure, while confirming that you are protected from HMRC’s stricter approach to compliance.
Why Williamson & Croft?
You must ensure that the relevant paperwork is completed correctly and/or the level of supporting documentation is up to the required standards.
If not, this could result in an HMRC enquiry or a processing delay that stalls your claim.
Due to our extensive experience within the field, we ensure that our team of experts deliver maximum value to your business.
We achieve this by utilising your existing record-keeping systems to capture all qualifying expenditure and to provide a robust report with enough technical narrative to satisfy HMRC should they launch an enquiry.
Our dedicated tax team are fully equipped to provide specialist advice and support clients through any complex event.
Our advice is clear and concise, and we manage the entire process of the tax relief claim to remove any stress or risks involved.
Contact us today if you need an expert to assist you with your RDEC filing.