Navigating Changes in R&D Tax Credits

Post by 
Maggie Stancheva
December 1, 2023

Navigating Changes in R&D Tax Credits: What SMEs in the UK Need to Know

In the bustling landscape of UK innovation, Research & Development (R&D) tax credits have long been the beacon guiding businesses towards growth. However, recent adjustments to the scheme have left many SMEs uncertain about eligibility and cautious about engaging with R&D tax relief consultancies. In this article, we delve into the changes and their potential impact on innovative SMEs in the UK.

Understanding R&D Tax Credits: A Quick Recap

Introduced in 2000 for SMEs and extended to large companies in 2002, R&D tax credits are a government initiative encouraging businesses to invest in research and development. The scheme allows profitable companies to reduce tax liability, while unprofitable ones can receive cash credits for a portion of their R&D expenditures. There are three key avenues for obtaining these incentives: the Small or Medium-sized Enterprise (SME) Scheme, the Large Company Scheme, and the Research and Development Expenditure Credits (RDEC).

What Defines an SME in the UK?

SMEs, or Small and Medium-sized Enterprises, are the lifeblood of the UK economy, spanning various industries. Small enterprises employ fewer than 50 people with an annual turnover not exceeding £10 million, while medium-sized enterprises employ fewer than 250 people with a turnover capped at £50 million.

Key Changes to the R&D Tax Credits Scheme:

  • Merger of R&D Tax Reliefs:

From April 1, 2024, the RDEC and SME schemes will merge into a unified scheme, simplifying rules and enhancing visibility.

For loss-making companies, the tax rate will drop from 25% to 19%.

  • Additional Relief for R&D Intensive Loss-Making SMEs:

The spending threshold for SMEs heavily involved in R&D to qualify for relief decreases from 40% to 30% of total expenditure.

Approximately 5,000 more SMEs become eligible for this relief.

  • Nomination and Assignment Changes:

From April 1, 2024, companies can no longer nominate a third party to receive R&D tax credit payments, with few exceptions.

Starting November 22, 2023, companies can't assign their R&D tax credits to others, streamlining payment processing.

  • Closing the R&D Review:

The government, after reviewing R&D tax relief schemes since Spring Budget 2021, plans to publish strategies for tackling non-compliance.

Ongoing collaboration with industries aims to improve support for R&D-intensive SMEs, with potential future simplifications.

  • Other Relevant Changes:

In addition to R&D tax relief-specific adjustments, changes in the Spring 2023 and Autumn 2022 budget, such as Corporation Tax rate alterations, impact innovative businesses.

Why the Changes and How They Affect SMEs:

The restructuring of the R&D tax relief scheme is a response to ensuring effective spending of public funds and combating fraudulent claims. By implementing these measures, the government aims to foster innovation responsibly. While not universally beneficial, the changes retain an incentive for innovation, aligning with the overarching goal of driving forward progress in the UK.

For further details on these changes, explore the Autumn Statement 2023.

As the R&D tax credits scheme evolves, staying informed is key for SMEs navigating the dynamic landscape of innovation incentives. Embrace change, stay innovative, and let your business thrive in this evolving era of R&D tax credits.