2023 R&D Tax Credit Changes Explained
The UK government has introduced a series of updates to the Research and Development (R&D) tax credit scheme. And they could make a big difference to your bottom line.
R&D tax credits are a way of rewarding businesses that invest in research and development. They can reduce your tax bill or give you a cash payment. But the new rules are not as generous as they used to be for small and medium-sized enterprises (SMEs).
So how do the R&D tax credit scheme changes affect your business? In this article, we’ll explore the impact of the changes and what SMEs need to know to take advantage of the new opportunities.
Key Changes to the UK R&D Tax Credit Scheme in 2023
The UK government has announced a number of changes to the R&D tax credit scheme for 2023. Here’s a breakdown of what your SME business can expect:
Increased minimum expenditure requirements
Previously SMEs could claim R&D tax credits if they spent at least £10,000 per year on qualifying R&D activities. However, this threshold has now been raised to £20,000 per year in 2023. This means that smaller companies may no longer be eligible for tax credits if they don’t meet the new minimum expenditure requirements.
New enhanced tax credit for R&D intensive SMEs
SMEs will see a reduction in the additional deduction from 130% to 86%, and a decrease in the SME credit rate from 14.5% to 10%. This effectively halves the cash benefit that companies could obtain pre April 2023. However, research-intensive businesses where at least 40% of their total expenditure is allocated to qualifying R&D projects, may qualify for a £27 refund for every £100 spent on R&D.
Increase in the R&D Expenditure Credit (RDEC) rate
The Research and Development Expenditure Credit (RDEC) rate has increased from 13% to 20%. This means that larger companies or grant funded companies which qualify for the RDEC scheme will receive a higher rate of relief on their qualifying R&D expenditure.
Account for R&D tax reliefs as income
One of the more major changes to the R&D tax credit scheme is the new requirement to account for R&D tax reliefs as income for tax purposes. This means that companies must now include any R&D tax credits they receive as taxable income when filing their tax returns. This change is designed to ensure that companies are not receiving a double benefit from the R&D tax credit scheme, and to bring the UK tax treatment of R&D tax credits in line with international accounting standards.
How will these changes impact SMEs Claiming R&D Tax Credits?
The recent changes to the R&D tax credit scheme are significant and will require companies to adjust their R&D strategies and budgets. The requirement to account for the relief received as income for tax purposes will have implications for businesses of all sizes.
Whilst the R&D tax credit scheme updates are less favourable to SMEs, it’s important to view them alongside the spring budget changes for 2023 as a whole. One such change is the increase in Corporation Tax rate from 19% to 25% for companies with profits over £250,000. This increase will partially offset the reduction in the overall R&D tax credit benefit, resulting in a difference of only £3.20 for every £100 spent. However, it’s important to note that this offset will only apply to profitable companies. For the majority of SMEs, the cash benefit of the R&D tax credit scheme will effectively be halved.