Jeremy Hunt's budget significantly reduced the amount SMEs can claim back in R&D Tax Relief, which will impact the fastest growing part of the economy: start-ups.
Our simple calculation above, based on £200,000 of qualifying spend, explains exactly what has been changed in this latest Autumn Budget for SMEs:
- The enhancement rate, which is used to calculate the enhanced expenditure, has been reduced from 130% to 85%
- The surrender rate, which is used to calculate the final R&D Tax Credit, has been reduced from 14.5% to 10%
The net impact is a reduction from 33% down to 18.5% for SME R&D Tax Credits.
Here are a few simple tips on how to make hay whilst the sun still shines.
Tip #1 - Spend it now
This will impact spending done after 1 April 2023.
Whilst it's usually prudent to spend on R&D in a linear fashion, staggering expenses over the year to avoid bottlenecks, you may want to consider front-loading expenditures before April 2023, to benefit from the more generous R&D Tax Credit scheme that remains in place until then.
You may also wish to discuss with your accountant shortening your year-end, in order to avoid potential delays at HMRC with the new calculations.
Tip #2 - Loss-making SMEs most affected
"The shift will be felt most by loss-making SMEs ." – James Kenedy, Leyton
As corporation tax is now longer being reduced to 19%, profitable SMEs should be less affected than loss-making ones.
Though the number of start-ups we know that are both profitable and spend heavily on R&D is not that high...
Tip #3 - Our friends can help
Front-loading expenditure isn't always easy - you need money to do so. Our partner company RockingHorse can help bridge the gap between now and the receipt of your tax credits, allowing you to accelerate your spend until April 2023.
Tip #4 - We can help too
With less generous government incentives now in place, companies will need to access more debt solutions to finance their growth. So if you need Venture Debt, have a look at our loans page to see if you qualify.
Tip #5 - RDEC has gone the other way - think grants
For the RDEC scheme, the expenditure credit has increased from 13% to 20%.
Whilst most SMEs will struggle to qualify for RDEC, companies who also receive a grant (such as Innovate UK) have their R&D Tax Credit automatically calculated based on RDEC.
Overall, RDEC remains slightly less generous than the SME scheme (15% vs. 18.5%), but it now makes applying for a grant an obvious strategy, even for companies that have significant R&D outside the grant.
Tip #6 - Cloud computing: a silver lining
There is a silver lining in the form of cloud computing, which is now allowed as a qualifying expense. Given most start-ups we know make heavy use of AWS and other cloud-computing services, we expect them to be able to claw-back some of that 45% drop.
Winter is here
Though winter is now here, and it has become paramount for start-ups to live within their means, it remains the case that start-ups with strong sales can still raise funds.
The budget therefore accelerates a shift start-ups and scale-ups should have been doing anyway: focus on sales - if in doubt, spend that extra £ on generating sales.
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