In yesterday’s Autumn Statement, the Chancellor, Jeremy Hunt, announced several significant changes to Research and Development (R&D) tax relief. Most notably, there is a substantial cut in the deduction rate of the R&D regime for small and medium-size enterprises (SME) from 130% down to 86%. This is in stark contrast to the government’s pledge to “turn the UK into [the] world’s next Silicon Valley”.

Additionally, there will be a reduction of the SME credit rate down from 14.5% to 10% for expenditure on or after 1 April 2023. The Research and Development Expenditure Credit (RDEC) rate, which mainly impacts larger companies, will increase from 13% to 20%.

These rate cuts follow a backdrop of potential abuse and fraud in R&D tax relief for SMEs, and days after the House of Lords Sub-Committee questioned key witnesses in industry about spurious claims. These concerns result in delays in the processing of genuine claims, which are causing significant working capital threats for businesses.

Whilst deficiencies in the scheme which leave it open to exploitation should certainly be tackled, the reduction in the rate of the SME scheme seems to be a sledgehammer approach to a more complex problem; many in the industry fear that the changes will punish SMEs who engage in genuine R&D activities. Yesterday’s announcement, coupled with the increase of the corporate tax rate from 19% to 25% next April will be very dispiriting for SMEs who partake in the scheme.

On the other hand, the increase in the RDEC rate for large companies is welcome news, which signals steps towards developing a single scheme for both SMEs and large companies.

If you need advice on the recent R&D tax relief announcements and how it will affect your business, please get in touch with Peter Little, R&D Tax Manager.