Question to the HM Treasury:

To ask the Chancellor of the Exchequer, pursuant to the Answer of 28 November 2022 to Question 90808 on Research: Tax Allowances, what estimate he has made of the annual financial impact of the lower SME R&D tax relief rate on genuine R&D intensive companies not believed to be submitting abusive or fraudulent claims; and if he will provide a sectoral breakdown.

As part of the ongoing R&D tax reliefs review, the Government is reforming the rates of the R&D tax reliefs. This reform ensures that taxpayers’ money is spent as effectively as possible, improves the competitiveness of the Research and Development Expenditure Credit (RDEC) scheme, and is a step towards a simplified, single RDEC-like scheme for all.

For expenditure on or after 1 April 2023, the RDEC rate will increase from 13 per cent to 20 per cent, the small and medium-sized enterprises (SME) additional deduction will decrease from 130 per cent to 86 per cent, and the SME credit rate will decrease from 14.5 per cent to 10 per cent.

Statistics relating to the R&D tax reliefs, including the distribution of R&D tax credit claims by industry sector, can be found here: https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit/research-and-development-tax-credits-statistics-september-2022#industry-sector-analysis.

The SME scheme costs twice as much as RDEC, and its cash value to loss-making firms is three times that of RDEC. Yet HMRC estimate that the RDEC scheme incentivises £2.40 to £2.70 of additional R&D for every £1 of public money spent, whereas the SME scheme incentivises £0.60 to £1.28 of additional R&D.

The UK provides a generous offer of support for R&D investment, and this will continue to increase, with R&D expenditure via tax reliefs estimated to increase from £37.2bn in 2020-21 to around £60bn by the end of the scorecard period, 2027-28, and direct funding for R&D will reach £20bn a year by 2024-25. The reform to the rates is estimated to leave the level of R&D related business investment in the economy unchanged.

Ahead of Budget the Government is working 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.

The Government is committed to refocussing the R&D reliefs towards innovation in the UK. At Autumn Budget 2021, the Government set out its intention to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK. The Government will allow for some narrow exemptions where it is in some way unavoidable for the R&D activity to undertaken overseas.