Autumn Statement: Measures to incentivise growthby
Aubrey Calderwood reviews the amendments made by Chancellor Jeremy Hunt to R&D schemes, capital allowances and investment zones, which are all aimed at incentivising innovation and growth.
The most significant changes were made to the research and development (R&D) tax relief scheme for small and medium-sized enterprises (SMEs) which has, for some time, been open to abuse and fraud. The separate R&D expenditure credit is better value but has a rate that is less internationally competitive. As a result, the government is rebalancing the rates of the reliefs.
For expenditure on or after 1 April 2023, the research and development expenditure credit (RDEC) rate will increase from 13% to 20%, the SME additional deduction scheme will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.
Example of the changes for SMEs:
Under the current R&D tax relief scheme, a company incurring £100,000 of qualifying R&D expenditure would be entitled to claim tax relief on an additional £130,000 of enhanced expenditure (£100,000 x 130%). At the current 19% rate, this would equate to a corporation tax reduction of £24,700.
By contrast, under the changes announced in the Chancellor’s Autumn Statement today, a company incurring £100,000 of qualifying R&D expenditure from 1 April 2023, would be entitled to claim tax relief on an additional £86,000 of enhanced expenditure (£100,000 x 86%). With the new corporation tax rate of 25% applying from 1 April 2023, this would equate to a reduction of £21,500.
The new rate translates into almost 13% less tax relief for businesses undertaking R&D. However, the most significant changes occur for businesses investing in R&D innovation who may be loss-making, as the following example illustrates.
Under the current R&D tax relief scheme, a company incurring £100,000 of qualifying R&D expenditure would be entitled to claim a tax credit of 14.5% on a total of £230,000 (ie the qualifying R&D expenditure of £100,000 plus the enhanced expenditure of £130,000). This would result in a tax credit of £33,350.
By contrast, under the new changes announced by the Chancellor today, a company incurring £100,000 of qualifying R&D expenditure would be entitled to claim a reduced tax credit of only 10% on a reduced total of £186,000 (ie the qualifying R&D expenditure of £100,000 plus the reduced enhanced expenditure of £86,000). This would result in a tax credit of only £18,600.
The difference between the current tax credit rate and the new one equates to a 44% reduction in the tax credit payment. Obviously for loss-making SMEs - who may be loss-making because they are start-ups who have invested heavily in product development - this represents a significant reduction in the availability of funds available for reinvestment and may have an impact on the continuation of innovation and product development.
While the increase in RDEC from 13% to 20% is to be welcomed, we would have concerns that the reduction in the SME rates for R&D and tax credits would act as a disincentive to innovation and R&D. Because the SME R&D scheme has fallen victim to fraud and abuse, we do understand the need to rationalise, regulate and control the scheme. However, the changes may disproportionately penalise SMEs that are carrying out genuine R&D and rely heavily on the support the R&D scheme provides to fund continuing innovation.
Development of the R&D tax relief scheme
The reforms are designed to improve the competitiveness of the RDEC scheme and are a step towards a simplified, single RDEC-like scheme for all. The Chancellor stated that 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.
As previously announced in the 2021 Autumn Budget, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance. These changes will be legislated for in the Spring Finance Bill 2023.
Annual investment allowance
As set out by the previous Chancellor, Kwasi Kwarteng, it was confirmed that the annual investment allowance (AIA) would be set at a permanent level of £1m from 1 April 2023. This amounts to full expensing for an estimated 99% of UK businesses, which means that those businesses can write off the cost of qualifying plant machinery investment in one go.
The Chancellor stated that a permanent increase would provide businesses with stability and simplify tax for any business investing between £200,000 and £1m.
Electric vehicle charge points
The Chancellor stated that in the Spring Finance Bill 2023, the government will legislate to extend the 100% first year allowance for electric vehicle charge points to 31 March 2025 for corporation tax purposes, and to 5 April 2025 for income tax purposes. This will ensure that the tax system continues to incentivise business investment in charging infrastructure.
The Chancellor stated that the government would refocus the investment zones programme to catalyse a limited number of the highest potential knowledge-intensive growth clusters, including through leveraging local research strengths.
The Department for Levelling Up, Housing and Communities (DLUHC) will work closely with mayors, devolved administrations, local authorities, businesses and other local partners to consider how best to identify and support these clusters, driving growth while maintaining high environmental standards, with the first clusters to be announced in the coming months. The existing expressions of interest will therefore not be taken forward.
Previous Chancellor, Kwasi Kwarteng had introduced the investment zone programme as a central plank of the government’s plans for economic growth throughout the UK with generous capital allowance incentives, relaxed planning and 100% business rates relief for all businesses investing in designated areas. The then Prime Minister, Liz Truss, had intimated up to 200 such zones may be possible.
However, the measures introduced by Chancellor Hunt today, effectively quash the previous investment zone programme and appear instead to focus on very specific areas with the highest potential for attracting growth industries.
With the corporation tax rate set to increase to 25%, as originally planned, the proposed amendments to the capital allowances super deduction were not required, so those deductions are withdrawn from 1 April 2023.
Has the Chancellor done enough?
While the changes to the RDEC scheme and a move towards the simplification of the R&D tax relief scheme are to be welcomed, the changes for loss-making SMEs are particularly punitive and may lead to a reduction in R&D activity in the UK. The measure may also act as a disincentive to inward investment into the UK.
I am also disappointed that there is still no replacement for the enhanced capital allowance scheme which was originally designed to encourage investment in energy and water-efficient technologies.
A much-simplified green commercial property incentive scheme targeting the development of highly energy-efficient buildings would have been welcomed, as would the introduction of a new tax incentive to encourage the redevelopment of town and city centres for both commercial and residential space.
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Aubrey Calderwood is managing director of leading fiscal incentives company, Gateley Capitus. He also previously ran the capital allowances practice of a ‘Big Four’ accountancy firm. He has a professional background in both taxation and property and has acted for some of the UK’s largest entities across a variety of sectors. Aubrey helps...