The rate of RDEC will increase from 12% to 13% from 1 April 2020, supporting businesses investing in research and development (R&D) and helping to drive innovation in the economy.

This measure increases the tax relief for large companies (and some small and medium size enterprises in some cases) that carry out qualifying R&D and claim RDEC. Around 7,000 companies are likely to benefit from the change to R&D relief.

It is estimated to cost £170m in 2020-21, rising to £310m by 2024-25, representing a total charge of £1.1bn over the five-year period.

The RDEC (also known as the 'above the line' credit) is a standalone credit that is brought into account as a receipt in calculating trading profits. The current general rate is set as 12% of qualifying R&D expenditure. This measure increases the rate of the RDEC from 12% to 13%.

The government will also consult on whether qualifying R&D tax credit costs should include investments in data and cloud computing.

The introduction of a PAYE cap on the payable tax credit in the SME R&D scheme will be delayed until 1 April 2021.

The government will also consult on changes to the cap’s design to ensure it targets abusive behaviour as intended while ensuring that eligible businesses are able to access the relief. Responses to the original consultation will also be published.

James Tetley, national head of R&D at RSM said: ‘The Chancellor’s Budget speech was full of references to investment in new technologies and innovation, and included some significant commitments to funding research in a range of sectors and industries, all of which can only be positive for the state of UK innovation.

‘For SMEs, the anticipated reintroduction of the PAYE cap has been delayed until 1 April 2021 and - subject to further consultation - will be introduced at a level of three times the company’s total PAYE and NIC bill.

‘This is a welcome reaction from HMRC to lobbying by the adviser community to ensure that the measures achieve their aim of countering abuse, without disadvantaging genuine claimants including small businesses with low payroll bills.

‘The big opportunity missed, was that there was no increase to the SME scheme, instead, the focus was on large companies.’

The increase in RDEC will also release cashflow for companies using the scheme, a welcome announcement as the country faces the fallout from the coronavirus threat.

Rachel Moore, innovation incentives lead at PwC, said: ‘This is a clear sign that the government is actively supporting investment in innovation by UK business and is serious in its ambition to increase UK investment in R&D to 2.4% of GDP by 2027.

‘The credit enhances operating profits and is payable to a company irrespective of its tax position which makes it particularly attractive to business. The rate increase suggests it will be here for the long term, enabling qualifying companies to plan their future cashflow.’