Autumn Statement 2023: Research and development tax relief changes

The UK Government has set a new course for the research and development (R&D) tax relief system, announcing a significant overhaul that merges the small and medium-sized enterprise (SME) and the research and development expenditure credit (RDEC) schemes into a single, consolidated framework. This change, effective from 1 April 2024, marks a pivotal shift in the R&D tax landscape, streamlining the process and broadening the benefits for companies engaged in innovative activities.

The merger of tax schemes for a simplified system

Currently, the RDEC and SME schemes have different rules and benefits. However, these schemes have now been amalgamated into a single framework to simplify the process. At the centre of this reform is the transition to a system where all R&D relief claimants will receive benefits through a taxable credit.

Consolidating these schemes establishes a unified set of rules and criteria, reducing complexity and administration, ensuring that companies of all sizes, and within varying sectors, can access the support they need for their R&D activities in a more straightforward manner.

The tax credit rate offered under the new scheme will be set at the current RDEC scheme rate of 20%. For loss-making companies, the notional tax rate of 19% will apply rather than the 25% main rate set in the current RDEC scheme.

Changes for R&D claims

The threshold for being considered as a R&D intensive business (RDIB) has lowered, and qualifying loss-making SMEs will be able to claim the repayable tax credit at a higher rate. The originally proposed threshold for qualifying as R&D intensive has been reduced from 40% to 30% of total expenditure.

There had been proposed restrictions on claiming relief for subcontracted R&D activities, where only the company outsourcing the R&D would be eligible to claim. Now, the company that initiates, manages and bears the burden of a R&D project can claim relief for the contracted works.

Companies can claim costs for contracted R&D work, but subcontractors delivering project outcomes for another company’s project cannot claim for the same activities. This distinction aims to prevent double claims and streamline the process.

The new scheme modifies the rules regarding the treatment of subsidised expenditure. 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, this will not reduce the amount of support available under the merged scheme.

A significant procedural change is the requirement that R&D credit payments must be made directly to the claimant company, rather than a nominee. This will streamline the payment process and ensure transparency.

A revised scheme for stability and compliance

While the Government’s review of R&D tax reliefs has concluded, HMRC is not resting on its laurels. A compliance action plan is set to be published aiming to continually monitor and address potential non-compliance, ensuring the integrity of the scheme.

The hope is that these changes will bring some stability to the R&D tax credits scheme and enable qualifying companies to claim tax reliefs with some certainty that they will be paid.