The Autumn Statement confirmed the creation of 'a new simplified R&D tax relief' combining the existing R&D Expenditure Credit (RDEC) and small or medium enterprise (SME) R&D schemes for accounting periods that commence on or after 1 April 2024.
Although this announcement would indicate a welcome (to some) simplification and move away from a two-tier system for R&D reliefs, the Chancellor followed up with an ongoing commitment to provide enhanced R&D reliefs for loss-making R&D 'intensive' SMEs under the existing SME R&D scheme. Tax practitioners may sigh at the retention of a separate scheme for the benefit of a relatively small number of SMEs (and the potential complexities for companies that transition between the two schemes). However, continued access to the enhanced reliefs under the SME scheme should be warmly welcomed and is likely to be of greatest interest to businesses in the life sciences and tech sectors.
Key points from these announcements are set out below.
Merged scheme
- The headline credit rate under the merged scheme will be 20% (in line with the more generous rate under the current RDEC scheme that has applied since April 2023).
- As an 'above-the-line' credit, this new R&D relief will itself be subject to corporation tax in the hands of the recipient company (similar to under the current RDEC scheme). Consequently, the benefits of the relief will be vulnerable to future increases in corporation tax rates. However, unlike under the current RDEC scheme, the notional tax rate applied to loss-making companies in the merged scheme will be the small profit rate of 19% (not the 25% main rate).
- This will effectively deliver a payable credit for profitable business of 15% and for loss-making business of 16.2% (applying the current rates of corporation tax).
- The simplification into one merged R&D scheme will be a welcome move for some businesses (though the potential for lower rates of relief, less so). In particular, it should stop companies having to navigate the complex transition between the two existing schemes.
- Although the new scheme will take effect for accounting periods that commence on or after 1 April 2024, many details are yet to be published so there is still uncertainty about who will be entitled to relief and how they can claim it. However, some key features of the merged scheme are summarised below.
(i) The current rules under the SME scheme restricting relief where part of the project expenditure has been subsidised (e.g. via a state aid grant) will not apply under the merged scheme.
(ii) Relief will be available in respect of contracted out R&D (though the details of how this will be defined are yet to be confirmed).
(iii) The merged scheme will adopt the more generous Pay as you Earn (PAYE) and National Insurance Contributions (NICs) cap which is currently applied in the SME scheme (being £20,000 plus 300% of the company’s total PAYE and NICs liability for the period).
(iv) However, the merged scheme will incorporate the previously announced restrictions on relief for overseas expenditure (in a form yet to be confirmed despite the issue being under consultation and review since the current Prime Minister was Chancellor two and a half years ago).
Loss making R&D intensive SMEs
- The rules for 'R&D intensive' loss-making SMEs announced at Spring Budget 2023 provide for an enhanced deduction of 86% and a repayable credit of 14.5%. This results in a potential relief of 26.7% of the R&D expenditure for qualifying companies.
- The 40% intensity threshold announced at Spring Budget 2023 will be reduced to 30% for accounting periods beginning on or after 1 April 2024. Accordingly, a loss-making SME company with qualifying R&D expenditure of 30% or more of its total expenditure from 1 April 2024 (and 40% from 1 April 2023) may be able to claim the enhanced deduction of 86% and a payable credit of 14.5%. Unlike the merged scheme, this credit will not itself be subject to corporation tax.
- HMRC calculates R&D intensity as the proportion of an SME’s qualifying R&D expenditure compared to its total spending for these purposes. Along with these changes, a one-year 'grace period' is being introduced for companies that fall below the 30% threshold so that they are not precluded from obtaining relief under this scheme for the following year.
- Large companies, profit-making SMEs and non-R&D intensive SME loss-makers will not be able to qualify for this credit, only the new merged R&D scheme.
Announced at the same time as the above was the introduction of legislation in the Autumn Finance Bill 2023 to remove the ability for R&D tax credit payments to be paid to assignees of R&D claimants (subject to limited exceptions). Consequently, from 1 April 2024 only the R&D claimant will be entitled to receive payment of any tax credits and no new assignments (whether equitable or statutory) of any existing R&D tax credits will be possible from 22 November 2023.
Whilst early stage and R&D intensive companies will benefit from the retention of elements of the legacy SME regime, the continual changes and uncertainty around the various regimes and their policing are unlikely to promote or incentivise investment in the manner the government seems to envisage. HMRC will soon be announcing a 'compliance action plan' to improve R&D tax credit compliance, although a significant reduction in the complexity of and changes to the regime(s) as well as a reduction in the bureaucracy involved would almost certainly be more effective.
