Policy paper

Additional tax relief for Research and Development intensive small and medium-sized enterprises

Published 18 July 2023

Who is likely to be affected

This change will affect loss making companies that have a high Research and Development (R&D) intensity (40% or above of their expenditure is on R&D) and claim the small or medium enterprises (SME) R&D tax credit.

General description of the measure

This measure introduces a higher rate of payable tax credit for loss-making R&D intensive SMEs. Companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity, instead of the 10% credit rate for non-intensive companies. This scheme is targeted specifically at loss making R&D intensive SMEs, who will benefit from this payable credit rate change. A company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure.

Policy objective

The government recognises the important role that R&D plays in driving innovation and economic growth as well as the benefits it can bring for society. Even in extremely challenging fiscal circumstances the government remains committed to supporting R&D. By providing further support to the R&D intensive SMEs as well as reforming the rates of the wider R&D tax reliefs system, the government is promoting the conditions for enterprise to succeed.

Background to the measure

At Autumn Statement 2022, the Chancellor announced that, as part of the ongoing R&D tax reliefs review, the government would reform the R&D tax relief rates to ensure taxpayers’ money is used as effectively as possible to support innovation.

As part of these reforms, for expenditure from 1 April 2023 the Research and Development Expenditure Credit (RDEC) rate increased from 13% to 20%, the SME additional deduction rate reduced from 130% to 86%, and the SME payable credit rate decreased from 14.5% to 10%.

The government recognises the value of R&D intensive SMEs to the UK’s wider innovation ecosystem, and the difficulties such SMEs face when raising capital, for example, in their pre-revenue phase to support innovation. The government acknowledged that the reform to the rates has created challenges for some R&D intensive SMEs, and therefore, at Spring Budget 2023 the Chancellor announced further support to these companies.

This confirmed a higher rate of payable tax credit for loss-making R&D intensive SMEs would be introduced and would apply to expenditure incurred on or after 1 April 2023. SME companies for which qualifying R&D expenditure constitutes at least 40% of total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying R&D expenditure

A technical note setting out more detail was also published alongside the Spring Budget 2023.

Detailed proposal

Operative date

The measure will take effect from 1 April 2023, with eligible companies able to claim on expenditure incurred on or after 1 April 2023, upon Royal Assent of Finance Bill 2023-24.

Current law

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

Proposed revisions

Legislation will be introduced in Finance Bill 2023-24 amending sections 1039, 1043,1044 and 1045 (relief for SMEs on the cost of R&D) to provide the higher rate of payable credit for R&D intensive SMEs, to define R&D intensive SMEs.

A new condition will be added at section 1045A to determine whether a company meets the R&D intensity condition in an accounting period for the purposes of sections 1044 and 1045.

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
-40	-285	-455	-505	-535

These figures are set out in Table 4.1 of Spring Budget 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2023.

Economic impact

This measure is not expected to have any significant macroeconomic impact.

Adjustments were made to take account of behavioural effects, including businesses adjusting their R&D expenditure in response to the measure.

Impact on individuals, households and families

There is no impact on individuals as the measure only affects businesses.

Equalities impacts

It is not anticipated that there will be impacts on groups of people sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a positive impact on loss-making R&D intensive SMEs who will be eligible for a higher payable credit rate of 14.5%. It is expected to have an impact on the costs of approximately 39,000 loss-making SMEs that carry out R&D and claim R&D tax relief. One off costs are expected to be negligible and could include familiarisation with the changes and updating systems to reflect them. There is expected to be some continuing costs as a result of this change, including for the approximately 20,000 businesses eligible for the relief that will be required to provide more information.

The measure is not expected to impact on civil society organisations.

Estimates of the costs are shown in the tables below:

Estimated one-off impact on businesses (£ million)

One-off impact	£ million
Costs	negligible
Savings	—

Estimated continuing impact on administrative burden (£ million)

Continuing average annual impact	£ million
Costs	£0.57m
Savings	—
Net impact on annual administrative burden	£0.57m

Operational impact (£ million) (HMRC or other)

The estimated operational costs for HMRC are in the region of £29.2m covering both IT and staff costs.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from claims and claim notifications.

The current R&D reliefs have been subject to periodic econometric evaluation, providing a good baseline for future evaluations. HMRC are collecting more information which enables HMRC to better monitor the relief through, for example, clearer data on what is being claimed.

Consideration will be given to evaluating the policy after 5 years of monitoring data have been analysed and collected.