The Corporation Tax system encourages R&D via two different schemes.
- The enhanced expenditure scheme for small and medium-sized enterprises (SMEs)
- The RDEC (Research & Development Expenditure Credit) for large companies
At present the enhanced expenditure scheme for small and medium-sized enterprises increases qualifying expenditure by 130%, so that for every £100 spent, the company enjoys a deduction of £230 from taxable profits. When applied, this may create a loss or further increase a loss for the business. Where there are no other profits against which a loss generated by R&D expenditure can be set, the loss may be surrendered to HMRC in exchange for a payable tax credit at 14.5%.
This scheme has been particularly useful to start-up companies and those struggling to make profits in their early years.
From April 2023 the additional deduction will decrease from 130% to 86% and the payable credit rate will decrease from 14.5% to 10%. For a loss-making company with, say, £20,000 of qualifying R&D expenditure, the payable tax credit will reduce from £6,670 to £3,720.
At present the RDEC scheme for large companies allow a taxable expenditure credit for qualifying R&D at 13%. This will be boosted to 20% from April 2023.
These changes appear to be the start of a process of moving all companies to an RDEC-like scheme, something on which the government intends to consult.
It is also worthwhile noting that the Research and Development Expenditure Credit can also be claimed by SME’s and large companies alike who have been subcontracted to do R&D work by a large company.
Expansion of qualifying expenditure
As previously announced, the R&D tax reliefs will also be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, targeting abuse and improving compliance.
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