The Spring Budget 2023: Changes to the R&D tax credits scheme

Chancellor Jeremy Hunt’s Spring 2023 Budget statement did not have the big headline changes to the research and development (R&D) tax schemes that we saw in his Autumn 2022 statement.

With there being objections from many groups, including businesses, trade associations/ bodies, investors and tax professionals, regarding the previously announced reduction in R&D tax credit claims from 33% down to 18.5% for loss-making companies, it was hoped that there would be a reversal of the change.

There was no reversal, however, he announced that R&D intensive companies will be able to claim a R&D tax credit equivalent of 27% for qualifying R&D expenditure.

But what is the definition of a R&D intensive company? For this purpose, it is a company that has a qualifying R&D expenditure which is at least 40% of its total expenditure. The company can be from any sector, but it only applies to loss-making companies.

However, as this change will not be applicable for all companies, many will still face having their benefit reduced to the 18.5% rate which will have a big effect on their financial capabilities to continue performing R&D activities.

Other Spring Budget announcements

To support its compliance work, HMRC will require companies to provide an additional digital information form with their claims. This requirement will only apply to claims made on or after 1 August 2023 and will require companies to provide further supporting evidence for claims. This change has been brought in to help HMRC identify the fraudulent claims that are being submitted for companies that do not actually meet the scheme’s criteria.

The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. This will be good news for companies that currently include overseas costs in their R&D claim.

The Government’s consultation on merging the research and development expenditure credit (RDEC) and small and medium-sized enterprises (SME) schemes closed on 13 March 2023 and it will now consider the responses, although no final decision has been made yet. The Government intends to keep open the option of implementing a merged scheme from April 2024 and plans to publish draft legislation for technical consultation in summer 2023 with a summary of responses. Any final decision on whether to merge the RDEC and SME schemes will be announced at a future fiscal event.

Overall, there was not as much change as the Autumn Budget, a positive for those companies that qualify as ‘R&D intensive’, even though they will still be receiving a slightly reduced R&D tax credit rate than they are currently.

The change to the foreign expenditure will be positive news for many companies across all sectors that currently have links abroad.

The next big change to look out for later in the year will be if the SME and RDEC schemes are to be merged and how the Government would propose this works to ensure that SMEs are not having their benefits reduced even further.