R&D Tax Relief: Why It’s Never Been a Better Time to Claim
Following the Autumn Statement, here’s why there will never be a better time to claim Research & Development Tax Relief, how capital allowances just became a whole lot more valuable, and why R&D allowances remain an under-claimed opportunity. It’s also a reminder that Investment Zones are still on their way and set to add even more value, and why you should not forget about the Patent Box.
Here’s how all of these initiatives are set to make your business positively better:
1. R&D Tax Relief: Remains an extremely valuable relief to claim
It’s been no secret that the R&D tax relief scheme has been widely scrutinised in recent months and became a target area for clamping down on boundary-pushing and abuse. It has been well documented that Rishi Sunak is an advocate of the large company “RDEC” scheme, whilst questioning whether the SME scheme (for small and medium-sized entities) really delivers value for money. Recent large-scale abuse of the SME tax credit system by certain advisors, paired with the lack of regulation in this area, means this is inevitably a primary area for the Government to target in an attempt to reduce the UK’s budgetary deficit.
As such, the following changes will come into effect for expenditures incurred on or after the 1st of April 2023:
- The rate of enhanced expenditure (additional relief) for SMEs undertaking qualifying R&D will reduce from 130% to 86%.
- The RDEC (research and development expenditure credit) rate for large companies will increase from 13% to 20%.
The net effect of these changes is as follows:
- Loss-making SMEs, who can currently claim up to 33.35p per £1 spent, will see this reduce to 18.6p per £1 spent for expenditure incurred after the 1st of April 2023, almost halving the value of such claims after that time.
- Profitable SMEs, who currently save an additional 24.7p per £1 spent, will see this reduce to somewhere between 16.34p and 22.79p per £1 spent, depending on the level of profitability.
- Large companies, currently claiming a net credit of 10.53p per £1 spent, will see the value of their claims increase by over 40% to a 15p net credit per £1 spent.
The legislation indicates that these changes affect expenditure incurred post-April 2023, which means that we will see the changes above gradually take effect over the next 12 to 18 months which will mean that it will never be a better time to claim. The changes seem to favour larger companies over SMEs, particularly loss-making companies, and it appears to be a step towards merging the two schemes into one (which is actually alluded to in the Government’s official documentation).
In terms of the wider R&D legislation, no further changes were announced other than those already coming into effect from April 2023 relating to anti-abuse measures, removal of overseas subcontracted expenditure, and a widening of the relief to include cloud computing and data expenditure.
This is still an extremely valuable relief. So long as claims are being prepared sensibly by a regulated adviser, it’s essential for companies to consider.
2. Patent Box tax relief: Tax savings significantly increased
For other corporate tax reliefs, no news meant good news. No changes were mentioned in terms of the patent box tax relief legislation which means that, from next April, profitable companies could save up to 15p per £1 of relevant IP profits made, up significantly from the current 9p per £1 saved.
3. Capital Allowances: Better than they’ve ever been
Following the recent budget, we now know there are no more surprises in store for the capital allowances rules, providing a clear picture of the reliefs available going forward.
Capital Allowances are now more valuable than at any point in the last decade.
The Super Deduction will end when the new tax rate goes up as expected, but this doesn’t mean a reduction in relief for capital allowances. At its best, the super deduction could offer 24.7p on the £1 saving for the main pool plant & machinery expenditure. From April 2023 onwards, the Annual Investment Allowances (AIA) will attract relief of 25p on £1 for all plant & machinery expenditures up to £1m spend. With the AIA limit now remaining at £1m permanently, there is a huge relief to be obtained through capital allowances for businesses buying and developing commercial property.
Additionally, it’s not just companies that will need the more valuable capital allowances reliefs. The changes to income tax will see sole traders and partnerships paying even more tax. Relief generated through capital allowances will again become even more valuable and can offer savings of up to 45p on the £1 for those paying the additional rate.
4. Research & Development: Allowances are still an underclaimed opportunity
While the R&D Tax Credit offering saw some changes, the capital allowances version: Research & Development Allowances (RDAs) was unchanged. It offers 100% first-year allowances for expenditure incurred on facilities & equipment used for R&D. For example, where R&D units are purchased, extended or refurbished, the same level of relief is attracted as AIA. However, RDAs have two major advantages over and above the AIA:
- RDAs are not capped at £1m
- RDAs are not limited to only plant & machinery
That’s right - RDAs are available on structural spending which would otherwise offer deductions of only 3% per annum, which can represent a massive uplift. The businesses purchasing or improving premises where R&D will be carried out stand to benefit from some significant reliefs.
5. Investment Zones: Still on the way
The Autumn Statement didn’t finalise anything about the Investment Zones announced in the mini-budget - but didn’t scrap them either. The government is “refocusing” where the zones will be, so watch this space to see where you can obtain unlimited first-year allowances and accelerated relief for structural spending (3% increased to 20% per annum) on your capital investment projects.
If you have any further questions, please click here to get in touch with us!