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Changes in store for R&D tax relief

Author: ICAEW Insights

Published: 18 Jan 2023

There are currently two R&D tax relief schemes available to businesses. Changes to these will come into force from April 2023, and there are proposals to redesign and overhaul these in the longer term.

Research and development (R&D) tax relief was introduced in 2000 to encourage companies to spend more on R&D. In the period from 1981 to 1999, expenditure on R&D in the UK fell as a proportion of GDP, while in most comparable countries it was rising. Has R&D tax relief achieved its aim of encouraging greater expenditure on R&D?

The statistics in our chart show a growing number of claims. This is for both R&D tax regimes: the regime for small and medium-sized enterprises (SMEs) and the R&D expenditure credit (RDEC). Surely the reliefs are a success? 

Although the reliefs were worth 0.25% of GDP in 2018 compared with an OECD average of 0.1% of GDP, UK business investment in R&D remains significantly lower than the OECD average. The latest evaluations published by HMRC show that while the RDEC scheme generates £2.40-£2.70 of additional R&D expenditure for each £1 of tax relief claimed, the SME scheme generates just £0.60-£1.28. At the same time, the SME scheme costs the government more than RDEC. The SME scheme has also grown at a faster rate than RDEC, and the R&D reliefs are forecast to continue growing.

In 2018/19, the latest year for which final figures are available, R&D relief cost £6.3bn. In its October 2021 Economic and Fiscal Outlook, the Office for Budget Responsibility predicted that the cost of the reliefs will increase from £7.7bn in 2021/22 to £11.9bn in 2026/27, unless modifications to the regimes are made.

Aside from the differences in rates and calculations between the SME scheme and RDEC, there are also divergences between what expenditure can qualify for relief. RDEC also has the advantage that companies can make a claim even if the expenditure is subsidised, something that is not possible under the SME regime. That is why some SMEs make RDEC claims.

Despite the number of claims by SMEs being higher, the value of claims by large companies was higher historically. RDEC has boosted both the number and value of claims by large companies. However, in 2016/17 the total amount claimed by SMEs started outstripping the amounts claimed by large companies. The provisional figures for 2019/20 show SME payable credits as being higher than RDEC claims by large companies.

A PAYE and NIC cap was reintroduced for SME credits from 1 April 2021. In May 2022, HMRC placed some R&D claims on pause while it investigated irregularities and introduced extra compliance checks in June.

Changes to R&D tax relief from April 2023 have been trailed since the Autumn Budget 2021. However, the Autumn Statement 2022 made a more surprising announcement: namely that the rates of relief will change quite significantly for expenditure incurred on or after 1 April 2023. To quote the Autumn Statement, this “is a step towards a simplified, single RDEC-like scheme for all”.

On Friday 13 January 2023, HM Treasury launched an eight-week consultation on the design of a single, simplified R&D tax relief scheme, merging the existing RDEC and SME R&D relief. If implemented, the new scheme is expected to be in place from 1 April 2024. Read the consultation.

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