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Changes to the R&D tax relief scheme

Valentina GolubovicValentina Golubovic
Last updated on:
November 21, 2022
Published on:
November 21, 2022

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On the 17th of November 2022, Jeremy Hunt, The Chancellor of the Exchequer delivered the Autumn statement announcing new fiscal changes planned in the coming years. The Chancellor stated that the budget will prioritise "stability, growth and public services"

The Autumn budget touched on many changes, including new rules regarding the R&D tax relief.

What is R&D tax relief?

An R&D tax relief is a tax relief which is attributed to companies that perform work relating to research and development.  The relief may take the form of a reduction in the company's present or future corporate tax liability or a receivable tax credit if the company is loss-making. A company's claim for relief will vary in size and nature depending on whether it was subcontracted for the R&D project.

What qualifies as research and development?

Government guidance on what qualified as research and development suggests that companies must explain how their project:

  • looks for scientific and technological advancements
  • overcomes or tries to overcome uncertainty
  • could not be easily worked out by a professional in the field

Companies can apply for an advance assurance to HMRC to see if their work is likely to qualify for an R&D tax relief.

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What are the new changes to the UK SME tax relief scheme?

Hunt announced that the government plans to reduce the deduction rate from 130% to 86%. This means SMEs will be able to deduct fewer qualifying costs from their yearly profits resulting in higher taxes.

There was also a cut to the tax credit rate from 14.5% to 10%. The tax credit allows SMEs to claim in the form of cash payment if they are loss-making. For larger companies, the Research and Development Expenditure Credit (RDEC scheme) for working on R&D projects is currently 13% of qualifying R&D expenditure, this has been increased to 20% in this autumn statement.

The Chancellor pointed out that the changes to R&D tax relief are said to have no impact on the level of R&D investment in the UK economy.  

Why did the government cut tax relief for SMEs?

In the Autumn statement, Hunt outlined that the cuts were a result of "concerning reports of abuse and fraud in R&D tax relief".

In HMRC's annual report for 2021/22, it was reported that around £429m has been fraudulently or incorrectly claimed in the form of R&D expenditures. The monetary value of the error or fraud represents 4.9% of total R&D tax relief expenditure which is an increase from 3.9% reported the previous year.

How does this affect SMEs?

The changes are sure to affect the business sector. Loss-making SMEs and start-ups, which frequently make significant R&D investments, have the highest fall in benefit. This is especially true for UK businesses operating in the tech industry.

As part of the UK Innovation Strategy, by 2035, the UK government hopes to establish itself as a hub for leading innovation. However with attractive reliefs for foreign direct investment and the benefit for start-ups reduced, one might doubt whether such changes may have a detrimental effect on the Innovation Strategy and growing the UK's position as a leader in the tech industry.

Jeremy Hunt reassured that in the next year the government will work "to understand what further support R&D intensive SMEs may require" however how this may be reflected in policy we are yet to find out.

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