- From 1 April 2023, the rates of SME R&D relief reduce to an additional 85% corporation tax deduction from the current 130% additional tax deduction. Also, the rate of Research & Development Expenditure Credit (RDEC) will increase to 20% from 13%. This change is part of the Finance Bill currently progressing through Parliament.
- Also from 1 April 2023, qualifying costs and the definition of R&D is amended so that certain cloud computing and data acquisition costs will become eligible for claims, as will advances in ‘pure mathematics’. This change is part of the Finance Bill currently progressing through Parliament.
- From 1 April 2023, a higher credit rate is available for loss-making, R&D-intensive SMEs, providing a higher cash benefit, as follows:
- Credit rate of 14.5%.
- Cash benefit of 27% .
This credit will be very much focused on businesses that need additional support, requiring that at least 40% of their total expenditure be on R&D expenditure. This change is part of the Finance Bill currently progressing through Parliament.
- From 1 August 2023, for R&D claims filed after this date, there are mandatory documentation requirements. This requires descriptions of the R&D undertaken, a breakdown of the qualifying costs, details of the company’s R&D advisor, and sign off from a senior officer of the company to be filed with the company’s tax return. This change is part of the Finance Bill currently progressing through Parliament.
- From 1 April 2023, the annual investment allowance (AIA) for capital expenditure will become permanent at a rate of GBP 1 million. This change is part of the Finance Bill currently progressing through Parliament.
- From 1 April 2023, a full expensing First Year Allowance (FYA) is available for capital expenditure incurred by companies from 1 April 2023 to 31 March 2026. Full expensing provides a 100% FYA in year 1 for main pool plant and machinery qualifying expenditure (with certain exclusions). Additionally, expenditure qualifying for special rate pool plant and machinery allowances could now benefit from a 50% FYA in year 1 under full expensing. This change is part of the Finance Bill currently progressing through Parliament.
Marginal Small Companies Relief
MSCR tapers the effect of the increased rate.
The MSCR calculation is: (Upper Limit – Profits) x Basic profits/Profits x MSCR fraction where
- Upper Limit is £250,000
- Basic profits are the companies trading profits / gains
- Profits are Basic Profits plus Franked Investment Income (FII is generally Dividends from other companies)
- MSCR Fraction is 3/200ths
There is however a simpler expression on a slab basis, where there is no FII:
| Profit Band | Marginal Rate |
| £0 to £50,000 | 19% |
| £50,000 to £249,000 | 26.5% |
| £250,000 plus | 25% |
These bands give the same result as the full formula and are easier to use, but maybe not as politically friendly as far as the Treasury is concerned.
Bear in mind these are Marginal Rates not Average Rates, for example:
| Example, Profits £100,000 | ||
| Slice £ | Rate % | Tax £ |
| £50,000 | 19.0% | £9,500 |
| £50,000 | 26.5% | £13,250 |
| Effective Rate and Total Tax | ||
| £100,000 | 22.75% | £22,750 |
| So we see an Effective Rate of 22.75% and a Marginal rate of 26.5%. The £22,750 is the same result as charging the whole profits at 25% and applying MSCR as legislation suggests. | ||
The Effective Corporation Tax rate at various profit levels will be:
| Profits | £50,000 | £75,000 | £100,000 | £150,000 | £200,000 | £250,000 |
| Effective CT % | 19.00% | 21.50% | 22.75% | 24.00% | 24.63% | 25.00% |
This Effective Rate applies to the whole of the profits.