Spring Budget 2023: Key announcements for Innovation Taxes

Andrew McMillan

Andrew McMillan

Tax Partner & Head of Innovation Taxes

The Chancellor’s spotlight continues to shine on the UK’s R&D tax relief system.

The Government has always stressed that it remains committed to the UK R&D tax relief system, whilst aiming to ensure that it rewards genuine innovation and modern R&D practices. Previously announced measures designed to target abuse and improve compliance will come in from April 2023, as will other known changes such as the extension of eligible software costs and the definition of eligible activities being widened to include pure maths.

SME scheme

As part of the Autumn Statement, the Government announced a reduction to the rate of R&D tax relief available under the SME scheme, which would have meant an effective rate of relief of 18.6% for loss-making SMEs. Much criticism followed this announcement, highlighting the importance of pre-revenue SMEs in the science and technology ecosystem and the detrimental impact that the proposed reduction could have on the level and speed of innovation undertaken in the UK. Recognising this misstep, the Government today announced that a higher rate of relief will be introduced for loss-making R&D intensive SMEs, effective from 1 April 2023. Available to qualifying companies spending 40% or more of their total costs on R&D, the effective rate of relief will be approximately 27%.      

Overseas expenditure and potential merging of R&D schemes

In other welcome news, the previously announced restriction on certain overseas expenditure will now come into effect from 1 April 2024, instead of 1 April 2023. This delay is designed to allow the Government to consider the interaction between this restriction and the design of a potential single merged R&D tax relief scheme. 

On this front, the Government’s consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes closed on 13 March 2023. The Government is currently considering the responses and no decision has been made. The Government intends to keep open the option of implementing a merged scheme from April 2024 and will publish draft legislation for technical consultation alongside the publication of the draft Finance Bill in the summer. Any further changes as a part of the ongoing R&D tax reliefs review will be announced at a future fiscal event, including a final decision on whether to merge the RDEC and SME schemes.

Creative industries

The House of Lords Communications Committee published a report recently stating that the Creative Industries should sit at the heart of the UK's economic growth plans. To put this in context, in 2019 the Creative Industries contribution to the UK economy was more than the aerospace, life sciences and automotive industries combined. However, the report highlighted many factors that could risk diminishing this success, including other countries overtaking the UK in providing more competitive tax incentives.

During the Spring Budget announcement, the Chancellor announced what appeared to be significant headline relief rates for each of the Audio-visual Tax Reliefs, with films, high end TV programmes and video games all at 34% and animations and children’s TV programmes at 39%. However, the devil is in the detail, with the consultation document making clear that qualifying expenditure relating to each of the Audio-visual Tax Reliefs will be capped at 80%.  Although the associated legislation is still to be published, using video games development as an example, on the assumption that £100k of qualifying spend would result in £80k being carried into the tax credit calculation, this would result in a net rate of relief of approximately 20%, mirroring that of the existing VGTR.  Combined with uncertainty introduced on the eligibility of EEA expenditure, not exactly the positive support those in the creative industries were hoping for.

Get in touch

Read the rest of our Spring Budget analysis on our Budget Hub, and for more information or to discuss any of the announcements, please don't hesitate to get in touch with me or your usual Johnston Carmichael contact.

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