Chancellor punishes all innovative SMEs because of the actions of a few

Chancellor responds to reports of abuse & fraud in R&D tax relief by cutting the SME scheme deduction rate to 86% and the credit rate to 10% but increases the rate of the RDEC credit from 13% to 20%. All innovative SMEs suffer because of the actions of a few...

18 November 2022


The Autumn statement, delivered today by the Chancellor, Jeremy Hunt, included changes to the R&D tax relief scheme.

For expenditure on or after 1 April 2023, the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. The Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.

Taking a loss-making SME as an example - they can currently get £33.35 for every £100 spent on eligible R&D. From April next year that same company will only receive £18.60 for every £100 spent on eligible R&D – a reduction of 44%. In contrast, profit-making SMEs see a reduction of 13% in tax savings.

Scott Henderson, CEO of ABGI UK commented:

“Whilst we recognise the need to adopt a balanced fiscal approach to address the current economic challenges, we’re disappointed that the Chancellor has chosen to target the SME scheme – apparently because he’s aware of reports of abuse and fraud.

ABGI believes that addressing abuse and fraud – by regulation and audit – would have been the right approach – rather than punishing the entire SME community for the actions of a few disreputable advisers and claimants.

In truth, these changes are a step towards a simplified, single RDEC-like scheme for all businesses. ABGI is supportive of steps to simplify the schemes, but we are concerned that reductions in relief, targeted disproportionately at loss-making SMEs, will stifle R&D at a time when we need all businesses to innovate a way out of recession. Many SMEs go through a phase of high growth where they make loss – a time when the R&D tax credit can be a real lifeline.”

A silver lining for SMEs in the Autumn statement is that no changes have been announced that affect the Patent Box scheme. Next year’s Corporation Tax rise to 25% means that from 1 April 2023 onwards, the maximum Patent Box benefit will increase by 67%, with a claim based on £200k of IP profits attracting a tax benefit of £30,000 (up from £18,000).