How the R&D Tax Credit Scheme Changes Affect Your Business

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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.

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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:

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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.

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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.

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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.

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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.

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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.

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