Budget March 2023 – Innovation Support

How does the government’s budget given on 15th March 2023 affect innovation companies? 

R&D Tax Credits – Existing changes 

Some planned changes will affect innovation that will continue to go ahead from the 1st April 2023: 

• Cloud computing, data costs and maths become eligible for an R&D claim. 

• SME R&D uplift rate changes from 130% to 86%. 
• SME R&D cash in losses rate changes from 14.5% to 10%. 
• RDEC R&D rate increases from 13% to 20%. 
• HMRC will continue to look at combining the SME and RDEC into a single ‘RDEC’ type scheme, possibly in April 2024. 
• Pre-registration of intention to claim R&D tax Reliefs is still going ahead. 

• G-Form R&D electronic submissions of R&D claim details will go live sometime after 1st April. 

R&D TAX CREDITS – WHAT IS NEW FROM THE BUDGET THAT WILL HELP INNOVATION COMPANIES? 

For R&D-intensive companies, defined as companies spending at least 40% of total expenditure on R&D, will be able to claim a 14.5% (the old rate) payable credit, which works out at 26.97pence in the pound for cash payments.  This will not help break-even or profitable companies, so only early-stage, heavily loss-making companies. This is expected to benefit about 11,000 companies across pharma/life sciences, digital, manufacturing and scientific/technical companies. 

It was planned that overseas expenditure on sub-contractors would be restricted from R&D claims from 1st April 2023, which has now been pushed back until 1st April 2024.  This will allow companies to plan and make changes to their subcontractor arrangements. 

The consultation on combining the SME and RDEC schemes concluded on the 13th March, with responses being considered with the potential for the merged scheme to operate from April 2024. 

Innovation Funding 

Aside from the R&D tax credits, some additional announcements around innovation support are available through different initiatives. 

Innovation Accelerators – The government has allocated £100 million in funding for the Innovation Accelerators programme and will shortly publish the details of the 26 transformative R&D projects in the Glasgow City Region, Greater Manchester and the West Midlands. 

Extending British Patient Capital – Building on British Patient Capital’s strong track record, the government will extend the programme a further 10 years until 2033-34 and increase its focus on R&D-intensive industries. This will bring at least £3 billion in government investment across key industries, including life sciences, Net Zero and deep tech, crowding in many multiples more in private capital. 

Long Term Investment for Technology and Science (LIFTS) – To support Defined Contribution (DC) scheme investment into innovative UK companies, the government will launch a Long-term Investment for Technology and Science (LIFTS) scheme, providing a key stimulus for industry to create the structures needed to mobilise DC scheme investment into our most cutting-edge companies. 

Up to £20 billion in funding for early-stage deployment of Carbon Capture. 

£900m to support building an axascale supercomputer to a new AI research resource, to support the growing AI industry, climate change modelling and new drug discovery.  

An investment of £2.5 billion over 10 years to ensure the UK leads in quantum computing. 

Creative Tax Reliefs 

Creative Industries are one of the high-growth sectors in the UK economy. 

The government will continue to support the UK’s world-leading creative industries by reforming the audio-visual tax reliefs into expenditure credits with a higher rate of relief than under the current system. The expenditure threshold for high-end TV will remain at £1 million per hour. The government will also extend the temporary higher rates of theatre, orchestra, and museums and galleries tax reliefs for 2 further years from April 2023. 

Tax reliefs for film, TV and video games will become an Expenditure Credits instead of additional deductions from 1st April 2024, at a higher rate of 34%, except for animation and children’s TV, which will have a higher rate of 39%. Video Games Expenditure Credit (VGEC) will focus on expenditure in the UK, except where games already in development have not concluded development by 1st April 2025 which may continue to claim under the current Video Games Tax Relief until this scheme’s sunset in April 2027, covering costs in UK and EEA. 

The temporary higher rates for Theatre, Orchestra, Museums and Galleries will be extended for a further period and not return to their normal 25% rates until 1 April 2026. These schemes will also change to an Expenditure Credits and again focus on UK expenditure. 

Advanced Manufacturing 

As another identified high-growth sector, there is a planned review of support for Advanced Manufacturing from Sir Patrick Vallance, which was announced in December 2022.  This is intended to ensure the UK is an attractive destination for manufacturing. Future reviews will be carried out by the governments new Chief Scientific Advisor, Professor Dame Angela McLean. 

Investment Zones 

The government is refocussing the Investment Zones to catalyse 12 high-potential growth clusters, 8 in England and 4 across Wales, Scotland and NI.  Each will access up to £80 million over 5 years, and each zone can offer a matched fixed 5 year tax offer to previously announced Freeports. Benefits will include enhanced rates on Capital Allowance, Structures and Buildings Allowance, and relief from Stamp Duty Land Tax, Business Rates and Employer National Insurance Contributions.