While we look forward to reviewing the final legislation and related HMRC guidance, the changes announced are generally positive, particularly the reduction in the threshold to qualify for the enhanced R&D intensive scheme for loss making small and medium enterprises (SMEs), the further clarity on who can claim for contracted R&D activities and the additional time provided for companies to prepare for the merged R&D expenditure credit (RDEC) scheme, which is now confirmed will take effect for accounting periods starting on or after 1 April 2024.
Overview of changes
For R&D claims made for accounting periods starting on or after 1 April 2024, there will be two R&D tax relief schemes in operation.
1. The SME ‘R&D intensive’ scheme
The SME R&D intensive scheme for loss making SMEs whose R&D expenditure meets specific thresholds was introduced in the Spring Budget and took effect for expenditure incurred from 1 April 2023. A welcome announcement in the Autumn Statement is that the threshold for qualifying as an R&D intensive SME will be reduced from 40% to 30% of total expenditure for accounting periods starting on or after 1 April 2024.
The SME R&D intensive scheme was introduced for costs incurred from 1 April 2023. It enables loss making companies that meet the existing SME thresholds for R&D relief and are claiming R&D expenditure totalling at least 40% of total costs, including connected entity costs, to claim a higher rate of cashback. This is set at 14.5% as opposed to the reduced 10% rate which was introduced from 1 April 2023. Provisions will be introduced to enable an intensive SME which has made a valid claim in the intensive regime in one year to claim the intensive relief in year two. This will avoid claimants moving in and out of the regime due to exceptional expenditure in a particular year.
Also, for accounting periods starting on or after 1 April 2024, the rule that treats any expenditure as met directly or indirectly as subsidised will also be removed from the intensive scheme. This should simplify the claim process and broaden access to the SME R&D intensive scheme.
2. The merged R&D expenditure credit (RDEC) scheme
For accounting periods starting on or after 1 April 2024, all R&D claims that do not satisfy the requirements of the SME R&D intensive scheme will be made under the new merged RDEC scheme.
The key features of the new RDEC scheme are:
- A 20% above the line credit for SMEs and large companies. For the first time, both SME’s and large companies will qualify for an above the line credit on qualifying expenditure at the current RDEC rate of 20%. The credit is accounted for as additional taxable income, so has a positive impact on EBITDA and net operating costs, a mechanism which, according to government statistics, has proven to be a more effective incentive to encourage R&D since it was introduced for large companies in 2013. The notional tax rate applied to loss-makers in the merged scheme will be the small profit rate of 19%, rather than the 25% main rate currently set in the RDEC, resulting in an increase in the RDEC cashback available to loss making claimants
- Restrictions to claiming non-UK based R&D activities. Except for under exceptional circumstances, precise details of which are still to be confirmed, costs relating to externally provided workers based outside the UK and activities contracted to non-UK entities will not be claimable. This will have most impact to claimants that make significant use of offshore resources to augment their UK managed and staffed R&D projects
- New rules for contracted out R&D. Where there is a contract between parties that results in the subcontracted company undertaking qualifying R&D, there will be a distinction between a contract for general services and contracted out R&D. In principle, the company identifying the need to undertake R&D as part of a contract for a 'commercial outcome' or general services and that takes on the risk of making the scientific, technological or engineering decisions that drive the R&D will be allowed to claim. This is a welcome update to the previous draft legislation and, if appropriate guidance is provided, should ensure that companies making the investment in recruiting and training UK based skilled scientists and engineers needed to undertake the contracted out R&D will receive the RDEC benefit. Also, companies will be able to claim for activities they contract out to third parties and that contribute to their qualifying R&D projects but would not qualify as R&D when looked at in isolation. So, for example, contracted out and ‘routine’ testing activities or clinical trials work that are vital supporting activities to R&D but would not be claimable in their own right by the contracted party will be claimable. In addition to this, contracted R&D carried out by subcontractors who are working for non-UK corporation taxpayers, such as overseas companies, will continue to qualify for relief
- New rules for subsidised expenditure. The intended operation of the contracted-out R&D rules set out above means that rules relating to subsidised expenditure in the existing SME scheme are no longer relevant, so these sections will be removed from the legislation for the merged scheme. For example, if a company receives a grant that covers part of the cost of its R&D, or if the cost of the R&D is otherwise met by another person, then, subject to the contracting out rules above, this will not reduce the amount of relief claimable under the merged scheme
Businesses may want to consider the impact of these changes now. Please get in touch if you would like to discuss these changes with our specialist R&D incentives scheme experts.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.