Policy paper

Technical note: Additional tax relief for Research and Development intensive small and medium enterprise

Published 15 March 2023

This technical note provides details on an additional tax relief for Research and Development (R&D) intensive small or medium sized enterprises (companies) (SMEs) from 1 April 2023. It provides businesses with information before draft legislation is published later in the year.

Chapter 1: Introduction

1.1 Science and innovation are 2 of the UK’s greatest strengths. With less than 1% of the world’s population, the UK hosts 3 of the world’s 10 best universities, has produced up to 13% of the world’s most impactful research and has the second highest number of Nobel Laureates of any nation. The UK also ranks fourth in the Global Innovation Index.

These remarkable achievements in R&D and innovation generate significant economic and social benefits for the whole of the UK and beyond, such as unlocking improvements in the health, wellbeing, prosperity and security of our citizens and communities. The Organisation for Economic Cooperation and Development (OECD) have estimated a 1% increase in an economy’s total R&D increases the level of multifactor productivity by around 0.15%, and that the social returns on R&D investment outweigh the private returns by a factor of four to one, underlining its public value ^{[footnote 1]}.

1.2 In light of this, the government remains committed to enhancing support for R&D. At the 2022 Autumn Statement, despite the fiscal constraints, the government recommitted to increasing public expenditure on R&D to £20 billion per annum by 2024 to 2025. This represents a cash increase of around a third and is the largest ever increase in public R&D budget over a Spending Review period.

1.3 It is important that government support for R&D is spent well. At the 2022 Autumn Statement the Chancellor also announced that, as part of the ongoing R&D tax reliefs review, the government would reform the R&D tax reliefs to ensure taxpayers’ money is used as effectively as possible to support innovation.

1.4 As part of these reforms, for expenditure from 1 April 2023 the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium enterprise additional deduction rate will reduce from 130% to 86%, and the SME payable credit rate will decrease from 14.5% to 10%.

1.5 The government recognises the value of R&D intensive SMEs to the UK’s wider innovation ecosystem, and the particular difficulties such SMEs face when raising capital – for example, in their pre-revenue phase – to support innovation. The government acknowledges that the reform to the rates has created challenges for some R&D intensive SMEs, and therefore, at Spring Budget the Chancellor announced further support to these companies.

1.6 To effectively target this support, loss-making SMEs with an R&D intensity of at least 40% will be eligible ^{[footnote 2]}. The delivery of this support is through the existing SME scheme.

Chapter 2: Commencement

2.1 A higher rate of SME payable credit will take effect for expenditure incurred on or after 1 April 2023, providing continuity with the current payable credit rate.

2.2 Companies will claim the credit in the same way as they currently do, in their Corporation Tax (CT) return.

2.3 Because this change will be legislated in a future Finance Bill companies will only be able to claim relief at a later date, once legislation is in place.

2.4 Companies making their claim for SME relief in the meantime will therefore claim any payable credit at the new 10% rate applying from 1 April 2023, but R&D intensive SMEs wishing to claim the additional support will be able to claim the higher R&D intensive rate by either delaying submission of their claim until the legislation is in place, or by amending their claim once the legislation is in place.

2.5 Normal time limits for making or amending a claim will remain applicable.

2.6 Whilst the relief available to eligible companies will be calculated by reference to the scheme start date of 1 April 2023, the claim will be processed as part of a company’s corporation tax return and correspondingly paid in arrears. For companies whose accounting periods start before 1 April, while the additional rate will apply to expenditure from that date, R&D intensity (and therefore eligibility) will be calculated by taking into account expenditure for the entirety of the accounting period.

2.7 Claims for payments under the additional support may take longer to process than normal SME scheme claims, as additional checks may be required.

Chapter 3: Outline of the relief

Eligibility

3.1 This support will be targeted using a new R&D intensity definition. This definition will calculate R&D intensity as the ratio of the company’s qualifying R&D expenditure (for both the SME and RDEC schemes) for a period to its total expenditure for the same period.

For example, if a company’s year end is 30 June 2023, then the higher rate of payable credit would apply to expenditure incurred from 1 April 2023 to 30 June 2023, if the overall qualifying R&D expenditure in the year ended 30 June 2023 meets the intensity threshold.

3.2 Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and by subtracting any amount not deductible for CT purposes.

3.3 This measure will use the current tax definitions of SME, R&D and of qualifying R&D expenditure which apply to the R&D reliefs.

3.4 SMEs will be eligible for this scheme for a period if they have an R&D intensity, defined as above, of 40% or above in that period.

3.5 Companies meeting this condition will be able to claim the additional support as part of their claim to SME credit, using the higher rate of credit for any expenditure on or after 1 April 2023.

3.6 To prevent manipulation of the intensity ratio, in calculating the ratio the qualifying R&D expenditure and total expenditure (as described above) of connected companies will be aggregated. Whether or not companies are connected will be determined according to schedule 1122 CTA 2010.

3.7 There will also be a targeted anti-avoidance rule which will deny or restrict the additional relief in appropriate circumstances. Rules will be included in the legislation to prevent manipulation of the relief for a tax advantage, including for commencement purposes and across the relief more widely.

Rates

3.6 For R&D intensive companies:

• the payable credit rate will be 14.5% instead of the 10% credit rate for non R&D intensive companies
• the additional deduction rate will remain at 86% on top of the normal 100% tax deduction for R&D

Delivery

3.8 This scheme will be administered by HMRC.

3.9 It will operate as part of the existing SME scheme, with R&D intensive companies claiming additional support to that provided by the SME scheme to other companies.

3.10 Relief will therefore be claimed by the company submitting or amending its CT return. Companies will indicate whether or not they are claiming as R&D intensive companies using a new digital ‘Additional information’ form which is being introduced for claims made on or after 1 August 2023.

3.11 The company will also use this form to provide information to support the claim, including its total expenditure and its derivation, as well as information about connected companies.

3.12 These features will be added to the digital form so that once legislation is in place, companies will be able to claim relief, including by amending an earlier claim relating to expenditure from 1 April 2023.

Chapter 4: Next steps

4.1 Draft legislation for this new relief will be published in the summer as part of the usual Finance Bill process, and the scheme will then be legislated in the next Finance Bill, to apply from 1 April 2023.

4.2 HMRC will publish detailed guidance for industry on access to this new scheme alongside the draft Finance Bill legislation in the summer, to ensure industry understands what this measure means for them, and what is to follow.

4.3 The government wants to ensure that the UK remains a competitive location for cutting edge research, and that the R&D tax reliefs continue to be fit for purpose, boosting investment innovation and working well for businesses, whilst taxpayer money is effectively targeted. The government recognises the case for supporting R&D intensive SMEs, and is committed to supporting those most impacted by the rate changes announced at Autumn Statement 2022.

4.4 The government’s consultation on the possible merging of the RDEC and SME schemes closed on 13 March. In order to keep open the option of a merged scheme, the government will publish a summary of responses and draft legislation on Legislation Day in July 2023. The consultation included questions on the case for providing more generous support to R&D intensive companies.

Following the announcement of this new scheme and its commencement from 1 April 2023, the government will consider the responses to these questions, and will keep the scheme design under review to ensure its effectiveness and its delivery of value for money. The government will continue to engage with industry on how this support might be improved going forward.

4.5 If you have any queries relating to this technical note, please contact HMRC

1. Guellec, D. and B. van Pottelsberghe de la Potterie (2003), ‘R&D and Productivity Growth: Panel Data Analysis of 16 OECD Countries’, OECD Economic Studies, vol. 2001/2 Lucking, Brian, Nicholas Bloom, and John Van Reenen. ‘Have R&D Spillovers Declined in the 21st Century?’ Fiscal Studies 40.4 (2019): 561-590. ↩

2. Chapter 3 contains further information on the exact eligibility criteria for this support. ↩