As the nation awaits the Chancellor of the Exchequer, Rachel Reeves’s annual financial statement, our attention turns to No. 11 Downing Street and the traditional holding of the distinctive red Budget briefcase.
This year’s budget attracts additional scrutiny, more so than usual, as it comes with a backdrop of various briefings on potential manifesto-breaking policy shifts and a now famous press conference where the Chancellor implied the possibility of raising income tax, a move that would roll back on the Government’s pledge not to raise tax on working people. Following this, the Government energetically rolled back on this notion by briefing that income tax raises were not on the table and will no longer be considered.
Alongside this unprecedented pre-budget briefing, commentators anticipate significant action. With the Government estimating a further £20 – £40 billion deficit the Chancellor must reduce, speculation is intense regarding how she will achieve this objective.
Anticipating R&D Tax Credit changes
Here at Leyton, we eagerly await what, if any, changes are made to R&D Tax Reliefs.
Previous budgets delivered vast updates to the scheme, from the lowering of the SME additional deduction rate from 130% to 86% and the increase in the Gross RDEC rate from 13% to 20%, and now the New Merged RDEC scheme rolled out from accounting periods beginning on/after 1 April 2024.
As a result, the outcome for R&D tax reliefs remains highly uncertain. One outcome we may see could be further tinkering of the rates. At the moment, the gross RDEC rate of 20% delivers a return on investment in R&D of between 15% and 16.2% based on a company’s corporation tax rate. Although loss-making R&D, intensive SMEs can still receive a cash benefit of up to 27% as a return on R&D investment, the UK is among the lowest when considered against comparable nations. For example, an SME in Australia receives a return on R&D investment of up to 43.5% and, in Canada, up to 64%, which are among the highest globally.
Closer to home, Ireland increased their net tax credit rate to 35%, up from 30% (which was increased only recently from 25%). Therefore, the Chancellor has the tough task of continuing to make the UK a favourable place for companies to undertake innovation.
Moreover, the recent changes to overseas expenditure have further diluted the number of companies that can maximise their claim. We could potentially see a shift in this policy to ensure UK companies are remunerated for their innovation.
More likely, the Chancellor could decrease in the intensity (ERIS) threshold which is currently at 30%.
Impact of HMRC’s compliance measures
HMRC undertook an unprecedented exercise to root out unscrupulous and fraudulent claims, and while the notion is admirable, the delivery is at best questionable. The most recent statistics for the 2023-24 tax year show a decrease in the number of claims (down 26%) and reduced the cost to the taxpayer (down 2%). At a high level, these figures look good; however, we must question how many viable claims HMRC have undermined due to aggressive enquiries, rendering companies exhausted by the process and unwilling to continue to claim against true innovation.
This is another area the Government may address, not necessarily through the budget but by changes to internal HMRC policy. It is clear from HMRC’s own statistics that SMEs suffer the most. The number of SME claims dropped 31% while the number of RDEC claims only went down 2.2%. Yet, the minimal (2%) savings to the taxpayer came primarily from SMEs with the total claimed by SMEs dropping 29% to £3.15 billion but with the total cost of RDEC claims rising 36% to £4.41 billion.
Ultimately, the headlines surrounding Income Tax, NI Contributions, Capital Gains, and Inheritance Tax have eclipsed discussions on R&D and other innovation incentives. Nevertheless, we hope the Chancellor delivers movement that will further incentivise UK companies to continue undertaking innovation. As a nation, the UK possesses a rich history in innovation and we very much look forward to this continuation.
Join our live webinar
Inside the Autumn Budget: Essential Changes for R&D Tax Credits, Capital Allowances & Business Rates
Following the UK Budget announcement, we will be hosting a live webinar session on Mon 1st Dec 12 – 1pm GMT, where our specialist consultants will provide live insights on the latest updates in R&D Tax Credits, Capital Allowances and Business Rates.
The session will conclude with a live Q&A, allowing an opportunity to have any specific queries answered in real time.
Register for the webinar
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