Budget 2023: enhanced tax credit for R&D intensive businesses welcomed

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A new enhanced tax credit for R&D intensive small and medium sized (SME) businesses is “excellent news for R&D intensive businesses across the UK,” a tax expert has said.

Penny Simmons of Pinsent Masons said that the Budget 2023 announcement of an enhanced tax credit for these businesses was a “huge relief” for those operating in sectors heavily dependent on research and development, particularly the life sciences sector. An enhanced R&D tax credit of 27% will be available to loss-making “R&D intensive” SMEs – those that spend 40% of total expenditure on qualifying R&D. Eligible companies will be able to claim a cash repayment of 14.5%.

“It is positive and reassuring to see how constructively the Treasury has engaged with R&D intensive sectors and listened to their concerns about the significant detrimental impact of cuts to SME R&D tax reliefs being introduced in April,” Simmons said. “It is reassuring that a workable solution has been found to reduce the detrimental impact of the cuts.”

“SME tax reliefs provide a vital source of financing for R&D intensive start-ups. Safeguarding tax relief for SMEs is essential – without it, many start-ups may have struggled to secure adequate funding to progress R&D and ultimately new UK based innovations. The ability for eligible companies to claim part of the credit as a cash repayment will be a huge relief for loss-making start-ups in the life sciences sector and those focused on developing technology to support the UK’s net zero transition, which may have limited access to other sources of finance,” she said.

She added: “Recent events involving Silicon Valley Bank and the exposure of tech and life sciences start-ups, demonstrate the often limited financing options available to UK start-ups. SME tax credits provide a vital financial lifeline to these businesses and it is welcome news that an enhanced tax credit is being introduced for R&D intensive businesses that need it most”.

Significant changes to the UK’s R&D tax credits system are being introduced from April 2023 as part of a government-led review into the R&D tax relief system. The repayment element of R&D tax credits for SMEs is being cut from 14.5 to 10% from 1 April 2023, whilst the additional tax deduction for R&D costs for SMEs is also being cut – from 130% to 86%. The rate of the research and development expenditure credit (RDEC) is rising from 13% to 20%. However, this predominantly targets larger businesses.

A new territoriality restriction to limit the availability of R&D tax relief to UK-based R&D will now be delayed until 1 April 2024, to allow the government to consider the interaction between the restriction and the design of a potential new R&D tax relief scheme, the chancellor has announced.

Simmons said: “The delay to the territoriality restriction combined with the new enhanced tax credit for R&D intensive SMEs really does make this a welcome Budget for the UK’s R&D intensive sectors – particularly the life sciences sector that was concerned about the impact of the new territoriality exemption, since life sciences R&D often needs to be subcontracted overseas for regulatory reasons.”

The definition of R&D is being expanded to include pure mathematics, and tax relief will also be available for cloud computing and data costs from 1 April 2023. New measures to combat abuse of the R&D tax reliefs system are also being introduced. These include a requirement for all claims to be made digitally with endorsement by a named senior officer of the company; and requiring advance notice to HMRC before making a claim – unless the company has made a claim in one of the previous three accounting periods – with details of any agent who advised the company making the claim. Companies will also be required to provide a digital additional information form for claims made from 1 August 2023.

The government is also currently considering proposals to introduce a new single R&D tax relief system based “as much as possible” on the existing RDEC scheme. According to the government, a single scheme based on the RDEC would be simpler for claimants to apply. It would simplify the UK tax system and further provide certainty of tax relief at an earlier point, making it more attractive to investors. The government is also concerned about the levels of error and fraud in the existing SME R&D tax relief scheme. Research intensive business had been urged to respond to a Treasury consultation document that closed earlier this week. The chancellor confirmed that the review remains ongoing and that the government intends to keep open the option of implementing a new merged scheme from April 2024.

Simmons said: “It is disappointing that the Treasury is still working towards introducing a new R&D tax relief scheme from 1 April 2024. Given that the chancellor has confirmed that draft legislation is not expected until the summer, this will not give businesses sufficient time to prepare and plan for the new regime. All businesses need certainty and clarity as soon as possible to make their R&D investment plans. It is vital that the transition to a new scheme allows businesses with sufficient time to digest and adapt to the new rules.”

Separately, the chancellor’s budget speech referenced the previously announced change in the UK’s approach to approval of new medicines and medical devices. From 2024, Medicines and Healthcare Products Regulatory Agency (MHRA) approval for medicines and technologies that had already received approval from “trusted regulators” – including those in the US, EU and Japan – would be “rapid, often near-automatic” according to Jeremy Hunt.

The MHRA, which will receive an additional £10 million in funding over the next two years, will also set up a swift new approval process “for the most cutting-edge medicines and devices”, Hunt said.

Life sciences expert Catherine Drew of Pinsent Masons said: “The UK has existing mutual recognition agreements (MRAs) with the US, the EU and other countries such as Switzerland and is a member of the Access Consortium, a coalition of regulatory authorities that work together to promote greater regulatory collaboration and alignment of regulatory requirements. It is clear the intention is to build upon these foundations, with pragmatic, work-sharing solutions to ensure UK patients get early access to the best technologies without compromising safety and introduce efficiencies for the benefit of industry,” she said.

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