Changes to R&D tax credits

2 weeks, 1 day ago by Oliver Atkinson

As part of a number of changes made by Jeremy Hunt during his November 2022 autumn statement, R&D tax credits are set to change. In the face of “concerning reports of abuse and fraud in R&D tax credits” from 1st April 2023 the Chancellor of the Exchequer is reducing R&D deduction rate for SMEs from 130% to 86%, and the credit rate, for companies making a loss, from 14.5% to 10%. To help visualise this we’ve put together some examples:

Profitable business using deduction rate:

As you can see this results in a 44% drop in R&D tax credits that will mean larger taxable profits and therefore a larger Corporation tax liability. For example, a company with Profits of £300,000 and £100,000 qualifying R&D expenditure will have taxable profits of £170,000 (300,000 – (100,000*1.3)) at the 130% rate but £214,000 (300,000-(100,000*0.86)) at the 86% rate. This will translate to Corporation tax liabilities at 25% (new rate from 1/4/23) of £42,500 and £53,500 respectively, or an increase of £11,000.

Loss making business using credit rate:

For companies that make a loss there are two options; firstly, you can apply the rates and carry the loss forward to reduce potential future total taxable profits or, secondly, you can apply the credit rate for a cash refund from HMRC. For example, using our chart above, we can say that a company with £25,000 qualifying R&D expenditure can carry forward additional losses of £57,500 at 230%, or £46,500 at 186% after 1st April 2023, to the next year to increase the loss and therefore reduce tax to pay in the future.

Or they can have this as a cash refund from HMRC at 14.5% of the R&D credit up to 1st April 2023 or 10% after. So, using our example above, this would be a £8,337.50 cash refund at 14.5% or a £4,650 refund at 10%.

Despite these changes, that effectively increase the tax burden for companies, Jeremy Hunt has assured us that “the OBR have confirmed that these measures have no detrimental impact on the level of R&D investment in the economy”.

Contact our team here if you have any questions, and here to see how we can help you claim R&D tax credits.