Last Autumn the Chancellor cut the enhanced deduction for expenditure by SME companies on R&D projects from an extra 130% to 86% and the payable tax credit from 14.5% of the loss surrendered to 10%. These new rates will come into effect for qualifying R&D expenditure incurred from 1 April 2023 onwards.
Some innovative companies complained that they rely on the R&D payable tax credit to provide funding for development costs until they can launch their new products. The cut in the tax credit rate to 10% will hit their cashflow and may mean that they must cease trading.
The Chancellor has listened to these concerns and restored the payable tax credit rate to 14.5% but only for R&D-intensive small companies. To qualify as R&D intensive the company must spend at least 40% of its total expenditure on qualifying R&D costs. This is measured as the expenditure listed in the company’s profit and loss account plus the additional amount in the R&D claim less any non-deductible expenditure.
Budgeting for R&D projects just got harder as it is a catch-22 situation – you will not know how much you will get back as R&D tax credits until your total costs are summed up at the end of your accounting year but if you do not meet that 40% cost threshold the R&D project may not be viable.
We can help you with cashflow projections when assessing your eligibility under the new rules.
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