Responding to concern about significant abuse of the SME R&D regime and in order to increase the international competitiveness of UK businesses, the government is rebalancing the rate of R&D relief for SME and Large Companies (under the R&D Expenditure Credit Regime), as follows:
For expenditure on or after 1 April 2023:
- Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%
- Small and Medium-sized Enterprises (SME) additional deduction will decrease from 130% to 86%
- SME credit rate will decrease from 14.5% to 10%.
The government will also consult on the design of a single R&D tax relief scheme and mechanisms to further support R&D intensive SMEs without increasing overall the £20bn allocated to supporting R&D in the UK.
In addition, as previously announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, targeting abuse and improving compliance.
The measures announced follow from the introduction of the SME PAYE and NIC cap and prohibition of overseas R&D costs. While the changes will be welcomed by large companies, they represent yet another blow to SMEs undertaking genuine R&D for whom R&D tax credits represent a valuable source of funding.