The R&D tax credit scheme saw some unanticipated adjustments in the Chancellor’s recent Autumn Statement. Relief for small and medium-sized businesses (SMEs) will be reduced beginning in April 2023.
Although Chancellor Jeremy Hunt claims that the adjustments to R&D tax credits were implemented to reduce the amount of fraudulent claims, it is expected that the reduction in the relief rate would have a detrimental impact on R&D activity among both new development businesses and those working on long-term projects.
What changes have been made?
Until the most recent budget announcement, small and medium-sized enterprises could claim 130% of their qualified R&D expenses from their corporation tax. This allowed businesses that made a loss to convert their losses into a tax credit at a rate of 14.5%, and also decreased corporation tax bills for successful companies.
Following the recent Autumn Statement, the increased deduction rate will drop to 86%, and the R&D tax credit rate that may be used to offset qualified losses will drop to 10%. This will be applicable to any expenses spent beginning on or after 1st April 2023.
How will this affect SMEs?
SMEs are expected to be most impacted by the rate reductions since they are the primary claimants of R&D tax relief. Business assistance during tough economic times has been further limited due to changes to R&D tax credits, however, this may not have a big effect for profitable enterprises.
Any loss in relief for profitable businesses will be mitigated by the rise in the corporation tax rate to 25% beginning in April 2023. For businesses with profits between £50,000 and £250,000, the corporation tax rate will stay put at 19%.
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