The Autumn Statement contained some unexpected announcements on the Innovation Taxes front, as well as an interesting consultation into the five audio-visual tax reliefs currently available.

R&D Tax Relief - David Ward, Partner and Head of Specialist Tax

In a surprise move, the Chancellor has cut the rate of R&D tax relief available for small and medium sized enterprises (SMEs), whilst increasing the rate of the Research and Development Expenditure Credit (RDEC), which is the form of relief available for large companies (as well as SMEs who undertake contract or funded R&D). Whilst this will be a welcome bonus for large companies claiming RDEC, the losers will be the small, innovative businesses that are self-funding their R&D activities. These are arguably the companies in most need of support. This will also have a particular impact on companies in their critical pre-trading stage, as SME R&D tax relief is the only form of R&D relief available to pre-trading companies and is a vital support for start-up businesses undertaking R&D to develop new products and services prior to commercialisation. A pre-trading company claiming SME R&D tax relief to support their privately funded innovation will see the effective rate of cash relief almost half following the reduction in rates announced today. 

The driver behind the changes is clear. The problems of fraud and error in the SME market have been well publicised and there is an ongoing focus on tackling abuse of the regime. The Government have noted that they expect this “rebalancing” of the support available between the SME and RDEC regimes will help in tackling this problem. However, whilst reducing the rate of relief available under the SME regime may reduce the incentive for companies or rogue R&D advisers to abuse the system, it will also penalise those innovative companies undertaking legitimate R&D activities. Tackling abuse of the regime should be the priority, with suggestions from industry including a requirement for tax advisers to be members of professional bodies, or otherwise subject to regulation. 

Turning to the details, the RDEC rate is increasing from 13% to 20% (in cash terms, the value rises from 10.5% to 15%, after taking account of the increase in the corporation tax rate). For SME R&D tax relief, the rate of the additional deduction will reduce from 130% to 86% and the rate of the payable tax credit will reduce from 14.5% to 10%. In cash terms, this will be felt most harshly by loss-making (or pre-revenue) companies, where the effective rate of SME relief reduces from 33% to 18.6%. The changes will have effect for expenditure incurred on or after 1 April 2023. 

These changes are being described as a first step towards a simplified, single RDEC-like scheme for all companies. A consultation is expected on the design of this single scheme. As part of our feedback to that consultation, we will raise the need for further support for R&D intensive SMEs, particularly those in the pre-trading stage, who are not currently eligible to claim relief under RDEC. 

Audio-visual tax relief consultation - Andrew McMillan, Director and Head of Innovation Taxes

The UK’s film, television and video games industries continue to excel, producing world class talent and intellectual property. As the digital sector continues to evolve, we have seen the emergence and growth of cross media products and services. Focussing on video games specifically, traditional games development is thriving, whilst games and game tech are being used to successfully tackle issues in other industry sectors.  

There are currently eight creative industry tax reliefs covering: film; animation; high-end TV; children’s TV; video games; theatre; orchestra; and museums and galleries. Within these eight reliefs, there are five audio-visual reliefs (film tax relief, animation tax relief, high-end TV tax relief, children’s TV tax relief and video games tax relief).  

As part of the Autumn Statement, the Government has announced a consultation into the five audio-visual tax reliefs. The stated objectives of the review are to ensure that: 

• The UK has modern audio-visual tax reliefs that enhance the UK’s audio-visual industries. 
• The reliefs maximise the contribution of the audio-visual industries to the growth of the UK economy. 
• The reliefs remain affordable. 
• The reliefs are straightforward to administer and that the reformed audio-visual tax reliefs do not significantly increase administrative burdens for businesses or HMRC. 
• Current and future commercial needs are anticipated without significant future changes being required. 
• The reforms do not create additional avoidance opportunities. 

Reforms proposed in the consultation include simplifying the film and TV reliefs by merging them into one tax credit scheme and modernising the criteria for high-end TV tax relief. The consultation will also consider whether a territorial restriction should be applied to video games tax relief, similar to that recently announced as part of the R&D tax relief reforms, to limit relief to activities in the UK. In addition, the consultation proposes reforming all of the audio-visual reliefs to “above the line”, refundable expenditure credits. 

The consultation will run from 17 November 2022 to 9 February 2023, with any subsequent reforms expected to be implemented in Spring 2024. As a firm, we will be engaging with clients and contacts, including trade bodies, with a view to providing feedback from across the audio-visual industries.  

Get in touch

Read the rest of our Autumn Statement analysis on our Budget Hub, and for more information or to discuss any of today's announcements, please don't hesitate to get in touch with our Innovation Taxes team.