New Rate of R&D Tax Credit Introduced for SMEs

We at Frazier & Deeter and Confluence Tax welcome the recent announcement by the Chancellor of the Exchequer that a new rate of Research & Development (R&D) Tax Credit will be introduced for R&D intensive SMEs (small and medium-sized enterprises) with effect from 1 April 2023. This should be of significant benefit to many of our clients in the life sciences and biotech sectors.

The new rate of R&D tax credit gives an effective 27p cash refund for every pound of qualifying expenditure by loss-making R&D intensive companies. This is a significant improvement on the effective rate of 18.6p on the pound which comes into effect for other companies claiming under the 1 April 2023 SME regime. The definition of R&D intensive companies is expected to be based on the company’s qualifying R&D expenditure representing at least 40% of its total expenditure in a year.

Our Observations

Under the previously announced changes, the difference between a claim under the SME scheme and a claim under the RDEC scheme was being eroded such that the benefits were very similar. This appeared to be a prelude to the merger of the two schemes into a single scheme which was planned for 2024. This announcement makes it clear that SMEs will receive more favourable treatment if they qualify as R&D intensive companies. This highlights two key considerations for a company:

• Ensuring it qualifies as an SME. This can be a particularly complex question where there are linked or partner enterprises and complex investment structures.
• Controlling levels of expenditure and correctly categorising/identifying qualifying expenditure on a real-time basis where the company may be borderline as an R&D intensive company. It will be particularly important for companies to be aware of the new inclusions to qualifying costs which had previously been announced and come into effect from 1 April 2023.

The announcement was light on details about the definition of an R&D intensive company but provided a few hints at what is to come. We are told that all claims under the new regime may be subject to added levels of scrutiny and may therefore take longer to process. In any event, no claims can be made until the legislation (expected to be in the next Finance Bill) has been passed. Companies may have to submit two claims for the year when the relief first applies: one for the standard R&D credit and a second for the additional relief once the legislation has received Royal Assent. Unsurprisingly, there will be anti-avoidance provisions to ensure the relief is not being abused.

The announcement on the additional relief for R&D intensive companies was accompanied by a separate announcement which delays by one year the restrictions on overseas expenditure qualifying for R&D relief. These changes were due to come in from 1 April 2023 but have now been pushed to 1 April 2024. The rationale for this delay is to allow time to consider how they will interact with the proposed single R&D regime which the Government is hoping to introduce in 2024.

While these changes will undoubtedly be of interest to companies in the life sciences and biotech sectors, it was interesting to see from the Government’s press releases which accompanied the Budget announcements that the majority of companies that will benefit are expected to be in the technology and manufacturing sectors. We will provide more details on the definition of R&D intensive companies as soon as they become available.