Policy paper

Reforms to R&D tax reliefs

Published 21 November 2022

Who is likely to be affected

This change will affect companies that carry out Research & Development (R&D) and claim R&D Expenditure Credit (RDEC) or the R&D tax relief for small and medium (SME) sized companies.

General description of the measure

This measure increases the rate of tax credit for companies that carry out qualifying R&D and claim the RDEC. RDEC is primarily aimed at larger companies but is claimed by SMEs in some cases.

The RDEC is a standalone credit that is brought into account as a taxable receipt in calculating trading profits. The current general rate is set at 13% of qualifying R&D expenditure. This measure increases this rate from 13% to 20%.

This measure also reduces the rates in the R&D tax relief for SMEs. The SME additional deduction rate will be reduced from 130% to 86%, and the rate of the SME payable credit rate which can be claimed for surrenderable losses will be decreased from 14.5% to 10%.

Policy objective

Increasing the amount of R&D carried out by companies is a key part of the government’s aim to increase productivity and promote growth.

R&D tax credits support business investment by allowing companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs.

This reform ensures that taxpayer support is as effective as possible, improves the competitiveness of the RDEC scheme, and is a step towards a simplified, single RDEC-like scheme for all. The government will consult on the design of a single scheme, and ahead of Budget work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D.

This change brings the generosity of the two schemes closer and simplifies the R&D tax relief system to increase R&D.

Background to the measure

At Budget 2021, the government announced reforms to R&D tax reliefs with the objectives of ensuring that the UK remained a competitive location for cutting edge research, that the reliefs continued to be fit for purpose, and that taxpayer money was effectively targeted. Several reforms have already been announced, including bringing pure mathematics research within scope of the reliefs, including data and cloud computing as qualifying costs, restricting expenditure on some overseas R&D activities and a package of measures to target abuse and improve compliance. Draft legislation for these measures was published for comment at legislation day on 20 July 2022.

As part of the ongoing review of the R&D tax reliefs, the government is reforming the reliefs to ensure taxpayers money is spent as effectively as possible.

This measure was announced at Autumn Statement 2022.

Detailed proposal

Operative date

The measure will take effect for expenditure incurred on or after 1 April 2023.

Current law

Current law on the RDEC is contained in Chapter 6A of Part 3 of Corporation Tax Act 2009 (CTA 2009).

Current law on the R&D tax relief rates for SMEs is contained in Chapter 2 of Part 13 of CTA 2009.

Proposed revisions

Legislation will be introduced in Autumn Finance Bill 2022 amending section 104M of CTA 2009, and sections 1044, 1045, 1055 and 1058 to substitute the new rates.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
0	+215	+620	+1070	+1250	+1340

These figures are set out in table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Economic impact

The Office for Budget Responsibility (OBR) have certified this reform has a net neutral impact on R&D expenditure, the reliefs are forecast to support £60 billion of R&D by businesses in 2027/28, a 60% increase from 2020/21. The OBR also expect the reform to save £1.3bn per year by 2027/28 and to reduce error and fraud.

Impact on individuals, households and families

This measure has no impact on individuals or households as it only affects businesses.

There is no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts on those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to impact the amount of tax relief being claimed by all businesses that claim tax relief through RDEC or the SME scheme.

The measure is expected to have a negligible impact on businesses administrative burdens. One-off costs include familiarisation with the changes and updating systems to reflect the rate changes. It is not expected there will be any ongoing costs.

This measure is expected overall to have no impact on business experience of dealing with HMRC as the measure doesn’t change any processes or tax administration obligations.

There are no impacts on civil society organisations.

Operational impact (£m) (HMRC or other)

HMRC may incur minimal operational costs to implement this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.

Further advice

If you have any questions about this change, please contact Yasmin Achha or David Harris on Telephone: 03000 592504 or 03000 586834 or email: [email protected] or [email protected]

Declaration

Victoria Atkins MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.