2022 Autumn Statement shakeup for R&D Tax incentives

The Rt Hon Jeremy Hunt MP was appointed Chancellor of the Exchequer on 14 October 2022. This was his first budget in post.

Of particular interest to MMP's clients is the impact the Autumn Statement could have on innovative businesses.

A shakeup of the incentives offered to innovative UK-based businesses was widely anticipated in the Autumn Statement 2022. But in reality, the nature of the reform, announced by the Chancellor Jeremy Hunt, is a mixed bag of unexpected and somewhat perplexing alterations.

Following the high-profile exposé by The Times recently, revealing the extent of mis-use of the SME R&D Tax Credit claim system, our expectation was that a further crackdown on fraudulent or ineligible claims was on the cards. This is something we have long pushed for. It was disappointing then to see that the Government is to merely introduce a scheme-wide reduction of the SME R&D Tax Credit generosity level from the current 33.35% rate to 18.6%.

While this may make the scheme less appealing to nefarious parties, the broader effect will see all genuinely innovative SMEs punished as well. Some of the nation's most innovative companies are small, loss-making businesses who rely on the R&D tax credit to take risks in developing innovations enabling them to bring their product to the market. As of 1 April 2023, however, for every £100,000 they spend on eligible R&D, they will receive only £18,600, rather than the £33,350 they were entitled to previously.

The impact will reverberate to small, profit making companies as well. The new, lower R&D tax credit with the higher 25% corporation tax rate, means their Tax Relief will reduce from 24.7% to 21.5%. So for every £100,000 of eligible expenditure the benefit will reduce from £24,700 to £21,500.

And for the smallest of profit-making businesses, the impact will be even more keenly felt, the reduction now standing at 16.34% from the previous 24.7%. So for every £100,000 of eligible expenditure, they will see their benefit reducing to £16,340 from the previous £24,700.

A real opportunity for the Government to actively target both fraud and more alarmingly, the seemingly large scale abuse of the scheme, has regretfully been missed. Smarter thinking could have brought some much needed reform to root out unscrupulous entities while still maintaining, or even increasing support for companies involved in genuine R&D. Reintroducing a minimum level of eligible R&D expenditure would arguably remove a large number of ineligible claims.

For large innovative businesses, the picture is thankfully far rosier. The generosity rate of the Research and Development Expenditure Credit (RDEC) scheme will increase from 13% of eligible spend to 20% of eligible spend, a net after tax increase to 15% from the prior net 10.53%, supporting large, cutting-edge companies to increase their R&D budgets. This will help the governments drive to reach its target of 2.4% of GDP on innovation spending.

Proposals made in last year's Autumn Statement regarding expanding qualifying expenditure have been confirmed. It means that legislation to include data and cloud computing costs will be legislated for in the Spring Finance Bill 2023.

The Chancellor also announced that a single scheme, combining the existing RDEC and R&D Tax Credit schemes, is under consideration. We cautiously welcome this proposal. It is an opportunity to remove the current disparity in relief where an innovative SME grows from loss making to a profit making business as well as simplifying what is an overly complex claim process and calculation.

In addition, our concern is that for the RDEC scheme, being an above the line credit, the task of finalising accounts and tax computations is burdensome and could be excessively onerous for SMEs to grapple with without the help of expert advice in this area.

A consultation on the creative sector reliefs is also in the pipeline. This will potentially result in a more generous Video Game Tax Relief scheme to further incentivise production of British-based content and support growth.

MMP has long been a supporter of the Video Game industry. We were winners of the best Accounting and Tax Firm for both 2020 and 2021 at the Independent Games Developers Association (TIGA) Awards and we welcome the Government's support of this innovative and expanding market.

Private sector investment in R&D is hugely swayed by initial spending from the public purse. It is therefore pleasing to hear the Government's annual R&D spend will rise to £20 billion from 2024-25, approximately a third more than 2021-22 figures. This amounts to the largest cash increase for R&D over a Spending Review ever.

It is a positive sign and hopefully indicative of the Government's intention to continue to support innovative UK-based businesses.