Major changes to Research and Development (R&D) schemes were announced in the Autumn Statement 2023 on Wednesday 22nd November. These included a merged scheme of both the research and development expenditure credit (RDEC) and the small and medium-sized enterprise (SME) intensive scheme.
The government mentioned the possibility of changes earlier in the year — but considering the amount of work required to implement a merged scheme, it’s surprising that it’s happening so soon. For accounting periods beginning on or after 1 April 2024, this will now be in place – unless you are an R&D intensive company! Don’t worry if all this sounds confusing, we’ll update on the changes below.
Merged R&D scheme
What does it mean? Well, the government stated that this will be a significant tax simplification. But judging by the draft legislation that was produced on 29th November, it’s hard to tell if this will be the case.
With the new rules introduced in 2023 — the additional information form and the notification requirement — and now a whole new merged scheme on the horizon for 2024, companies have simply not had time to plan ahead. It’ll take some catching up to ensure that they understand and are up-to-date with the rules and guidance.
So far, all we know is that the changes will be for accounting periods beginning on or after 1 April 2024, and that they’ll include:
- A single set of qualifying rules
- Removing the list of qualifying bodies
- Contracted-out R&D change in view by HMRC (see below)
- Step 2 reduction for merged scheme (see below)
Contracted-out R&D
There had previously been no change in the legislation on this point. However, due to the FTT cases against HMRC, there’s been plenty of discussion on HMRC’s view of how to interpret this legislation. It appears that there’s been a change in course from HMRC, and now they’re back to the understanding that the company bearing the risk are the eligible company to claim for the qualifying R&D.
Further discussions will be held by the Government with industry to understand how a potential merged scheme could distinguish between ‘contracts for services’ and ‘contracted-out R&D’ — so that those undertaking qualifying R&D are able to claim relief, whilst avoiding double claims. Following engagement over the summer, the Government has now legislated for the approach outlined in the Autumn Finance Bill 2023.
For example:
Where a company with a valid R&D project contracts a third party to undertake some of the (qualifying) work connected with their R&D project, the company may claim the relevant (qualifying) costs of that contract. The company contracted to do that work may not claim for R&D activities that deliver the project outcome for another company’s project.
If a company is contracted to do work for another company, but the work does not form part of R&D for the customer, and was instead initiated by the contractor, then the contractor may be able to claim relief for their work. This will be the case if they meet the requirements of having valid R&D that is otherwise eligible for tax relief, as it is considered an essential element.
The exact details of who should claim the relief will depend on the specific contract. To ensure consistency across the regime, for accounting periods beginning on or after 1 April 2024, these rules will also apply to R&D intensive SMEs.
Step 2 reduction
The Step 2 RDEC reduction will continue in a similar manner under the merged scheme. Payments will be reduced via a notional tax for loss-makers, so that the amount of benefit is similar for loss-makers as it is for profit-makers — with companies being able to off-set the amount withheld against tax in future years.
This will be done by calculating the net amount at Step 2 using the rate applicable to the taxpayer —either the small profits rate (SPR) (currently 19%), or the main rate (25%), but applying the SPR to loss makers. This change will ensure that loss-making companies receive more cash benefit upfront.
Additional tax relief for R&D intensive SMEs
In the Spring Budget 2023, the R&D intensive SME scheme was introduced for R&D expenditure from 1 April 2023. As announced, a company was considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure.
Autumn Statement update:
- The limit to qualify as an R&D intensive SME will be reduced from 40% to 30% of total expenditure.
- The Autumn Finance Bill 2023 will contain the final clauses to bring this into effect.
- This will bring approximately 5,000 more R&D intensive SMEs into the scope of the relief.
- A one year grace period, so that companies that dip under the 30% qualifying R&D expenditure threshold will continue to receive relief for one year.
- The Government will legislate so that the rule that treats any expenditure as met directly or indirectly as subsidised, will also be removed from the intensive scheme.
Therefore, for accounting periods beginning on or after 1 April 2024, this legislation will no longer apply in the R&D credits, which should simplify the overall process of making an R&D tax claim further.
Extra updates
- Subsidised expenditure in the existing SME scheme is no longer relevant and will be removed from the legislation for the merged scheme. (This means that 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, this will not reduce the amount of support available under the merged scheme, subject to the contracting-out rules.)
- Overseas externally provided workers rules to still come into play, and not be eligible expenditure from accounting periods beginning on or after 1 April 2024, with some exceptions.
- Removal of nominations of third-party payee for R&D tax credit payments, resulting in payments made directly to the company claiming.
- Non-compliance still a concern, HMRC to publish a compliance action plan in due course.
Summary
The decision to push ahead with the reforms from April when there is limited guidance and the rules have not been finalised feels a bit hasty. Nonetheless, we will do all we can to make sure that you feel ready and have the knowledge to plan and prepare your business for these changes. If you have any questions, please contact the R&D team at rdtax@ct.me.
Author: Alenka Jessop, CT: R&D Tax
