R&D Tax Relief
Further changes to the R&D Tax Relief scheme announced in the Autumn Statement 2023
Following the Autumn Statement 2023, a series of changes to the R&D Tax relief scheme have been announced.
Launch date for the unified R&D Tax Relief scheme for SMEs and Large Companies confirmed
Effective for accounting periods starting on or after 1 April 2024, the merged scheme is aimed to simplify the claims process and remove complexities present in the current schemes. In actuality, the changes are bound to introduce more complexity, with a varying impact on Large Companies and SMEs.
A separate scheme will persist for loss-making R&D intensive SMEs, coined the ‘R&D intensive scheme’. Meanwhile, for most SMEs, the merged scheme means a further reduction in the amount they can receive through R&D tax relief – down from the current 18.6% to between 15% and 16.2%, depending on their tax paying position.
The Revenue released a technical note clarifying the scheme changes announced in the budget
The technical note details the reforms made for the merged R&D tax relief scheme, focusing on subcontractor rules, subsidised R&D, and the R&D intensive scheme.
Contracted Out R&D
Under the merged scheme, the decision-maker undertaking R&D can now claim for contracted-out R&D, aligning relief with the company assuming the associated risks. This approach aims to encourage increased collaboration and knowledge sharing, fostering economic growth. This positively impacts Large Companies, that can now qualify for subcontracted expenditure, historically limited to certain qualifying bodies, such as research institutions and Universities.
With the changes in contracted-out R&D, rules relating to subsidised expenditure in the existing SME scheme become obsolete. SMEs with subsidised expenditure must currently claim under the RDEC scheme for Large Companies. This change removes the complexity around grant funding on R&D projects where all costs can now be claimed through the merged scheme.
Overseas Expenditure and Externally Provided Workers
The removal of overseas subcontracted expenditure will come into legislation on 1 April 2024 as planned. Limited exceptions apply when the necessity arises for geographical, environmental or social conditions not present or replicable in the UK. This will have a large impact on companies using overseas teams to carry out their R&D.
Concerns regarding a potential double restriction on Externally Provided Workers (EPWs) will be addressed in the final legislation.
SME cap for tax credits remains in the merged scheme
The SME scheme’s PAYE and National Insurance Contributions (NIC) cap is being adopted for the merged scheme. This is more generous than the credit cap used under the RDEC scheme and will mean more businesses will have sufficient PAYE and NIC totals to cover their R&D tax credit claims.
Separate scheme for loss-making R&D-intensive companies
The R&D intensive scheme, designed for highly R&D intensive loss-making SMEs, undergoes an adjustment. The threshold for R&D intensity is reduced from 40% to 30% of total expenditure, providing enhanced relief for approximately 5,000 more companies. R&D intensive companies will receive 27% back from the scheme, considerably higher than the 15% to 16.2% available to non-R&D intensive SMEs.
Provisions have been introduced to address concerns about exceptional spending impacting intensity ratios through a one-year grace period for companies falling temporarily below the intensity threshold. This ensures stability for businesses dipping in and out of the intensive SME regime’s limits, allowing them to continue claiming under the R&D intensive scheme for one additional year.
Accountants and R&D advisers can no longer receive claim payments on behalf of clients
This initiative, with a few specific exemptions, eliminates the utilisation of nominations for R&D tax credit payments. Consequently, payments will no longer be directed to third parties; instead, they must be disbursed directly to the claimants.
These reforms mark a strategic effort by the UK government to fortify its support for R&D, foster innovation, and create a more straightforward and effective R&D tax relief system. The changes streamline certain processes and aim to address potential challenges faced by businesses engaging in intensive R&D activities.
However, no complexity is being removed from what constitutes as R&D for tax purposes and an in-depth approach is still required to prepare and submit claims. As such, claiming companies should ensure they seek advice from a reputable R&D advisor.