Further development of R&D tax reliefs
At the Spring Budget 2023, the Chancellor of the Exchequer announced changes to the R&D tax reliefs with draft legislation published on 18 July 2023. Following this, we published two articles on the key headline announcements, being that the government proposed to introduce a single merged R&D tax relief scheme modelled on the R&D Expenditure Credit (RDEC) while retaining part of the SME scheme to offer additional relief for R&D-intensive SMEs.
However, the developments have not stopped there as the Chancellor announced changes in the Autumn Statement 2023. Full legislation detailing the operation of the schemes is now included in the Finance Bill currently progressing through Parliament.
Here, we revisit both the merged R&D scheme and the additional relief for R&D-intensive SMEs. For those looking to incur qualifying R&D expenditure, we explore what further changes have been made and what this means, in a practical sense.
Autumn Statement and Finance Bill
Although the government previously published draft legislation for the merged R&D scheme, it had not fully committed to implementing it. The government did, however, confirm during the Autumn Statement 2023 that the merged scheme would go ahead. Although subject to some criticism during the technical consultation process, the government similarly confirmed that they would retain part of the SME scheme to target R&D intensive loss-making SMEs (now being referred to as the SME intensive scheme).
Most of the framework provisions for both the merged R&D scheme and SME intensive scheme remain as before and the recent changes are mainly technical amendments to improve the general operation of the schemes.
Merged R&D scheme
The design of the merged R&D scheme is in line with previous announcements and the legislation provides for a 20% “above the line” expenditure credit. Relief under the merged scheme would be provided as follows assuming taxable profits, before R&D expenditure, of £500,000 and qualifying R&D expenditure of £50,000:
The most significant technical changes from the Autumn Statement 2023 are those relating to contracted-out R&D, which we have commented on in a separate article. It is however important to note that these changes to the contracted-out R&D rules also means that the subsidised expenditure rules will also fall out of scope and will not restrict the incentives offered under the merged R&D scheme where grants or other funding is received.
- The other key changes announced at the Autumn Statement 2023 include:
Clarification in the legislation that there will not be a double restriction on externally provided workers. - With the merged scheme operating as an above-the-line credit, the credit is charged at the company’s applicable rate of corporation tax, either the main rate (25%) or the small profits rate (19%). However, the notional tax applied to loss-making companies will always be at the small profits rate. Loss-making companies will therefore enjoy a slightly enhanced effective rate of relief.
- The merged R&D scheme was initially intended to apply to expenditure incurred on or after 1 April 2024 but it, along with the SME intensive scheme, will now only come in for accounting periods starting on or after 1 April 2024.
SME intensive scheme
The SME intensive scheme will broadly follow the current SME scheme and allow an enhanced 186% deduction for qualifying expenditure and a 14.5% payable tax credit where losses are surrendered. Profit-making SMEs cannot benefit from the SME intensive scheme, even if they meet the “R&D intensive” criteria. There were, however, changes announced at the Autumn Statement 2023, summarised below:
- Under the previous proposal, qualifying R&D expenditure had to comprise at least 40% of total expenditure for the SME to be “R&D-intensive”. This has now been reduced to 30%.
- A grace period is being introduced allowing eligible SMEs to claim relief for two years, where they have made a valid claim in one year, to avoid companies moving in and out of the scheme due to exceptional spending.
- HMRC will only allow tax credit payments to be paid to the claimant company (and not to third-party nominees) to counteract fraud in the industry.
Rules will be introduced to counteract companies manipulating their R&D intensity ratio by shortening accounting periods. - The rule that previously treated expenditure met directly or indirectly as subsidised expenditure will be removed.
Conclusion
Outside these technical measures, the government also confirmed that the review of R&D tax reliefs, which was announced at the Spring Budget 2021, has now concluded. The government has however indicated that further action may be required to target R&D non-compliance, with further simplifications and support also possible for R&D-intensive SMEs.
It appears, therefore, that further changes are likely as the government continues to review this area. Companies looking to benefit under the R&D regimes will be hoping for certainty but there are still wrinkles to iron out.
Companies will have additional time to familiarise themselves with the new framework. They will, however, need to start considering the complexity of the new merged R&D scheme and the SME intensive scheme before April 2024. Please do contact our R&D team to explore how we can help you navigate these complexities and prepare for the transition.