Revised R&D Tax Relief for SMEs
The UK Government has long recognised the significance of research and development (R&D) projects in driving economic growth. As part of its efforts to encourage investment in R&D, the government offers lucrative tax reliefs to both SMEs and larger organisations. However, it is essential for companies engaged in R&D activities to stay informed about the recent reforms to R&D tax reliefs, which came into effect in April 2023.
Under the previous regulations, profitable SMEs involved in research and development projects were allowed to deduct an additional 130% of their qualifying costs from their annual profit for Corporation Tax purposes until 31st March 2023. This was in addition to the regular 100% deduction, enabling them to offset up to 230% of qualifying expenditure against their costs.
However, starting from 1st April 2023, this uplift has been reduced to 86%, meaning SMEs can now make a total deduction of 186% (including the normal 100% deduction).
Moreover, SMEs can also claim a payable tax credit if they have incurred a loss after claiming relief. Previously, this credit was worth up to 14.5% of the surrenderable loss, but it has now been reduced to 10%.
Nevertheless, R&D-intensive businesses, which spend 40% or more of their total expenditure on R&D, still qualify for an enhanced rate of 14.5%. To be classified as an SME, a business must have fewer than 500 staff members and a turnover of under 100 million euros. Furthermore, the R&D projects must be focused on science and technology.
R&D Expenditure Credit (RDEC)
The R&D Expenditure Credit (RDEC) is a tax relief scheme primarily aimed at larger corporations. However, SMEs can also claim RDEC if they are ineligible for R&D tax relief for small and medium-sized enterprises. Effective from 1st April 2023, companies can now avail themselves of a credit worth 20% of their qualifying R&D expenditure, marking an increase from the previous rate of 13%.
While the RDEC is taxable, it offers companies the flexibility to offset their corporation tax bill or claim it as a cash payment, providing substantial financial relief for those undertaking R&D activities.
Other R&D Reforms
In addition to the changes in tax relief rates, the Government has introduced the following reforms:
- Mandatory digital submission of Advanced Assurance notification forms by SMEs to HMRC from 1st August 2023.
- Expanded R&D expenditure categories to include costs associated with datasets and cloud computing.
- Recognition of R&D in pure mathematics as qualifying for relief.