Small and medium-sized health tech businesses will lose out following changes to the R&D tax credit regime, argues Mercer & Hole’s Mark Pashley.
The Chancellor’s recent changes to R&D tax credits have incurred much criticism from UK tech founders at a time when the country needs to assert itself as a viable innovative hub in the wake of Brexit and the continued impact of the pandemic.
One of the biggest changes announced in the 2022 Autumn Statement was a reduction in the relief available for small and medium sized enterprises (SMEs) under the government’s R&D tax relief scheme with the rationale of reducing abusive and fraudulent claims in the SME market.
Currently, an SME can claim an additional corporation tax deduction equal to 130% of qualifying expenditure incurred on R&D projects.
If the company is profit-making, this will have the effect of reducing its corporation tax liability for the period.
Where a company is loss making, it has the option of exchanging its loss (up to a maximum of the sum of the qualifying expenditure and enhanced deduction) for a tax credit at a rate of 14.5 per cent.
Alternatively, the additional loss can be carried forward to be offset against future profits.
That now changes following Autumn Statement.
Expenditure incurred after 1 April 2023 will qualify for a deduction of 86 per cent.
The tax credit rate applied to qualifying losses will fall to 10 per cent – a significant drop in the level of relief for SMEs who make up by far the largest proportion of claimants.
With the increase in corporation tax rates to 25 per cent from 1 April 2023, the impact on a profit-making claimant may be less severe than anticipated, with the corporation tax saving on £100,000 of expenditure falling from £24,700 to £21,500.
However, in the case of a loss-making company who exchanges its loss for a tax credit, the amount receivable is almost halved.
Bigger benefits for larger corporations?
There is better news for larger companies as the Chancellor announced that the tax credit available in relation the Research and Development Enhanced Credit (RDEC) scheme would be increased.
The RDEC scheme is applicable to large companies and in limited circumstances to SMEs where they are unable to make a claim under the main scheme (for example, where they are a sub-contractor and have received subsidies for projects).
The tax credit available to companies on their qualifying expenditure after 1 April 2023 will increase from 13 per cent to 20 per cent.
Therefore, if an RDEC claimant had qualifying expenditure of £100,000, the tax credit potentially available would increase from £13,000 under the current regime to £20,000.
The Government’s argument for improving the RDEC rate is that it is a less competitive when compared against other countries.
It will, it hopes, offer greater support to larger companies without creating a greater risk of abuse.
It should not be forgotten, however, that although the RDEC rate is in itself a generous increase the tax credit itself is subject to corporation tax.
The changes represent a bias towards larger companies who do not represent the majority of R&D claims, leaving SMEs short-changed.
An overcomplicated system?
What is apparent is just how complicated it can be to benefit from R&D tax relief.
Changes introduced in the 2022 Autumn Statement look to curb abuse of the system – claims must now be digitally input and further endorsed – whilst opening up the availability of R&D tax credits for other areas of technological innovation, including Cloud Computing and datasets where they are included as part of an R&D project.
The latter is a welcome as this sector has long been overlooked.
However, the anti-fraud measures introduced by HMRC combined with a two-scheme system has made the job of those overseeing the financing of R&D schemes for corporations extremely difficult.
There is a hope on the horizon for companies bamboozled by HMRC requirements and particularly, SMEs who feel short-changed by November’s announcement.
The eight-week consultation, launched on 13 January running to 13 March 2023, sets out proposals on how one single scheme could be designed to replace the two separate schemes.
Financial Secretary to the Treasury, Victoria Atkins said:
“Getting R&D tax relief right and fit for the future sits at the heart of making sure the UK remains a competitive location for cutting edge research. I welcome views on the option to simplify the scheme, especially from those who have experience of the existing tax reliefs.”
We would encourage all health tech businesses to engage in this consultation and ensure their voice is heard.
Mark Pashley is a corporate and business tax partner at accountants Mercer & Hole.