The Chancellor announced his plan to increase the Corporation Tax (CT) rate effective from 1st April 2023. Currently there is a flat rate of 19% and this will rise to 25% in the coming year.
The Government are also reintroducing the small profits rate of tax to help smaller businesses and as a result, the 19% rate will continue to apply to companies with profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.
How will the rate increase impact R&D tax relief claims?
Whilst there is no change to the rate of R&D tax relief itself, the proposed increase will impact the value of future R&D claims.
The SME R&D scheme allows for an additional 130% deduction of qualifying costs, and a company with taxable profits exceeding £250,000 could see the value of their claim has increased. With the example below, if the Company had carried the losses forward, this would generate a tax saving of 25% against future profits as opposed to the current 19%.
Example: A Company with profits of £300,000 and £400,000 of qualifying R&D costs.
| 25% CT Rate | 19% CT Rate | |
| Profits chargeable to Corporation Tax before R&D | 300,000 | 300,000 |
| 130% Deduction (400,000 * 130%) | (520,000) | (520,000) |
| Revised Loss for the year | (220,000) | (220,000) |
| BENEFIT OF THE CLAIM | ||
| Surrendered for R&D tax credits (220,000 * 14.5%) | 31,900 | 31,900 |
| Corporation Tax Liability pre-R&D reduced to nil | 75,000 | 57,000 |
With the RDEC R&D scheme being a taxable credit, there may be an adverse effect for claims where the potential benefit is reduced with the increased tax rate. In the example below, the current 19% rate would generate a tax saving of £21,000 as opposed to £19,500 with the new changes.
Example: A Company with profits of £400,000 and £200,000 of qualifying R&D costs.
| 25% CT Rate | 19% CT Rate | |
| Profits chargeable to Corporation Tax before R&D | 400,000 | 400,000 |
| RDEC Adjustment (200,000 * 13%) | 26,000 | 26,000 |
| Revised Profit for the year | 426,000 | 426,000 |
| Tax Charge @ 25/ 19% | 106,500 | 80,940 |
| RDEC credit | (26,000) | (26,000) |
| Corporation Tax Payable | 80,500 | 54,940 |
| Corporation Tax Liability pre RDEC claim | 100,000 | 76,000 |
| Corporation Tax Liability post RDEC claim | 80,500 | 54,940 |
| Benefit of RDEC claim | 19,500 | 21,060 |