In a time when political parties are obsessed with three-word slogans, the Chancellor bucked that trend (in his Spring 2023 Budget) and delivered his Spring Budget against a backdrop of his four Es – “Enterprise, Education, Employment and Everywhere”. In the Enterprise section, the Chancellor made a few changes to the R&D scheme.
Under the guise of providing “further support for R&D intensive Small and Medium Sized Enterprises (SMEs), via an enhanced rate of tax relief for loss-making companies”, the Chancellor has made another change to the R&D scheme. The rates of relief expected to apply from 1 April 2023 were announced in November 2022, but following widespread (negative) comment, the Chancellor has partially rolled back his cuts to the scheme.
Rates of relief
Before November 2022, the rate of relief for loss-making SME companies was effectively 33p for every £1 spent, the November 2022 changes reduced that to 18.6p but now, as a result of the announcement in the Spring Budget, the rate of relief will be 27p. The final twist in this tale is that the new rate of relief will only be available to R&D “intensive companies” – defined as those spending over 40% of their total expenditure on R&D activities. The other rates of relief applied regardless of the level of expenditure.
As always, the biggest issue around areas such as this is not so much what the rates are but how much certainty a company can place on the figures when projecting their cash flow and future levels of R&D activity. In the space of six months, a company spending £100,000 R&D has seen their anticipated benefit fluctuate from a high of £33,350 to a low of £18,600 and has now settled, hopefully, on £26,970.
One word of caution, though, the changes are planned to take effect from 1 April 2023 but draft legislation for this will not be published until Summer 2023 and will be subject to final consultation and approval. A company with a short accounting period could be in a position where they are eligible to claim the new rate of relief, but legislation is not in place to enable that to happen.
Overseas expenditure restrictions
Not content with making one change to the planned operation of the R&D scheme from 1 April 2023, the Chancellor has pushed back the implementation of overseas expenditure restrictions by one year. Companies with overseas R&D expenditure were facing a big change to what could be included in their claim with effect from 1 April 2023, with almost all overseas expenditure being disallowed from that date. This change has been pushed back to become effective from 1 April 2024.
Additional supporting information
Next up, in the supporting documentation, is the announcement that R&D claimants must provide additional supporting information for all claims made on or after 1 August 2023. We knew this change was coming, but it was previously stated that the additional information would be required for accounting periods starting on or after 1 April 2023 – this accelerates the change and reinforces the increased compliance activity around R&D claims.
Merged schemes
The final R&D point is that the Government intends to “keep open the option of implementing a merged scheme from April 2024”. The Government will publish draft legislation on a merged scheme for technical consultation alongside the publication of the draft Finance Bill in the Summer. Any further changes as a part of the ongoing R&D tax reliefs review will be announced at a future fiscal event, including a final decision on whether to merge the RDEC and SME schemes. The overall tone of communication has been that the Government wants to merge the two schemes, and a single RDEC-type scheme will be put in place in 2024.
In summary, the Budget has seen some changes brought forward, some changes pushed back and some new changes introduced with two weeks’ notice. As the Greek philosopher Heraclitus is quoted as saying, “the only constant in life is change”.
If you have any questions in relation to what we have mentioned above, please get in touch with your normal BHP contact.
