Question to the HM Treasury:

To ask the Chancellor of the Exchequer, with reference to paragraph 5.52 in the Autumn Statement, CP751, published on 17 November 2022, what assessment his Department has made of the potential impact of decreasing the SME additional deduction rate from 130% to 86% on the number of SMEs conducting R&D.

At Autumn Statement 2022 the Chancellor announced that as part of the ongoing review of R&D tax reliefs, the Government is reforming the reliefs to ensure taxpayers’ money is spent as effectively as possible. The R&D expenditure credit (RDEC) is better value than the SME scheme but has a rate that is less internationally competitive. Also, there is significant error and fraud in the small and medium-sized enterprises (SME) scheme, with the generosity of the relief making it a target for fraud. The Government is therefore rebalancing the rates of the reliefs.

For expenditure on or after 1 April 2023, the RDEC rate will increase from 13% to 20%, the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. These Autumn Statement 2022 rate changes will be legislated for in the Autumn Finance Bill 2022.

Following reforms announced at the Autumn Budget 2021 and the Autumn Statement 2022, the Treasury has estimated the forecasted cost of R&D tax reliefs using OBR determinants. On a receipt basis the R&D tax reliefs are estimated to cost the exchequer: £7.5 billion in 2022/23, £7.7 billion in 2023/24, £7.6 billion in 2024/25, £7.9 billion in 2025/26, £8.5 billion in 2026/27 and £9.2 billion 2027/28. The reliefs are forecast to support £60 billion of R&D by businesses in 2027-28, a 60% increase from 2020-21.

The Government further aims to merge the schemes into one RDEC like scheme which may result in revised forecasts depending on the final policy design.

Despite a challenging fiscal environment, the Government is protecting the commitment to increase public spending on R&D to £20bn a year by 2024-25. This represents a cash increase of around a third compared to 2021/22 and is the largest ever increase over an Spending Review period.

The Treasury has estimated R&D tax reliefs will compromise of approximately 28% of total Government support for R&D in 2024/25.

The Government will consult on the design of a single scheme, and ahead of Budget work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost for supporting R&D. Details on the proposed design of the single scheme and the timeline for merging will be published in due course.