How does the Autumn Budget impact tax-efficient R&D?

A key theme in the Chancellor’s Autumn Statement was championing growth and stability, as well as supporting the research and development work carried out in the UK.

In his budget, Jeremy Hunt announced big changes to the research and development (R&D) tax schemes. It was confirmed that the additional deduction and tax credit rate on the small and medium-sized enterprises (SME) scheme would both be reduced. However, the research and development expenditure credit (RDEC) rate will be increasing.

The Government stated that these changes are in response to the significant errors and continued abuse of the SME scheme, with the generosity of the relief making it a target for fraud.

The changes announced included:

• RDEC rate will increase from 13% to 20%.
• The additional deduction on the SME scheme will decrease from 130% to 86%.
• Reduction of the SME credit rate from 14.5% to 10%.

What do these changes mean for companies?

Profit-making

Here is an example of how these changes would translate for an innovative engineering or manufacturing company. This assumes that the company is profit-making and has a qualifying expenditure of £100,000.

• Current scheme rules: £100,000 of qualifying expenditure x 130% = £130,000 enhanced expenditure x 19% corporation tax rate = A corporation tax reduction of £24,700.
• New scheme rules: £100,000 of qualifying expenditure x 86% = £86,000 enhanced expenditure x 25% corporation tax rate (assuming company profits of over £250,000) = A corporation tax reduction of £21,500.

Loss-making

However, what would it mean for a loss-making engineering and manufacturing company? Again, this example assumes that the company has a qualifying expenditure of £100,000.

• Current scheme rules: £100,000 of qualifying expenditure + £130,000 enhanced expenditure = £230,000 at 14.5% credit rate = £33,350 tax credit.
• New scheme rules: £100,000 of qualifying expenditure + £86,000 enhanced expenditure = £186,000 at 10% credit rate = £18,600 tax credit.

This equates to a 44% reduction in the tax credit payment. So, loss-making SMEs appear to be the big losers in the changes announced.

Will the changes to the R&D tax credits scheme truly support innovation and development?

The increase in the RDEC scheme rate is the start of bringing the schemes in line with each other and having one scheme for all, rather than the current two schemes. This simplification can only be a good thing.

We can fully appreciate the rationale behind the changes and intentions for regulation, as there are clearly several companies and agents taking advantage of the scheme through fraudulent and inaccurate claims.

However, the announced changes may end up having a detrimental effect on many smaller companies, especially those that are currently loss-making. Why? Because they may be a start-up business spending heavily on product development. But because of these changes to the R&D scheme, and the current economic climate, they may now have to reconsider their plans to invest in further innovation. Ironically, this is exactly the opposite of what the Government wants them to do.