On 22nd November, The Chancellor Jeremy Hunt announced over 100 measures in his Autumn Statement aimed at boosting economic growth in the run up to the general election next year. As expected, Mr Hunt announced several measures related to the R&D tax relief schemes, including the anticipated ‘merged’ R&D regime, in addition to permanent changes to Capital Allowances.
Merged R&D Tax Scheme – RDEC For All
The Chancellor Jeremy Hunt announced the final verdict on a previously proposed merged R&D tax relief regime based on the existing Research and Development Expenditure Credit (RDEC). The new scheme, which will apply to accounting periods that commence on or after 1 April 2024, will merge the small and medium enterprise (SME) and RDEC schemes in a bid to address error and/or fraud in the SME regime and streamline the administration of the tax incentive. The new set of rules import more ‘generous’ concepts from the existing SME scheme into a merged regime modelled on the RDEC framework and provide clarity on several restrictions, which we outline below.
Merged R&D Tax Scheme – Key Facts
- The new scheme will apply to accounting periods that commence on or after 1 April 2024.
- The headline credit rate will be 20%, the same RDEC rate that has applied since April 2023, and the notional tax rate applied to loss-makers will be the 19% small profits rate (16.2% net) rather than the 25% main rate under RDEC (15% net).
- The relief will be an ‘above-the-line’ credit and will therefore be subject to corporation tax.
- The merged scheme will adopt the more generous PAYE and NIC cap currently applied to the SME scheme (£20,000 plus 300% of total PAYE and NIC liability for the claim period).
- Restrictions on relief for overseas expenditure and Externally Provided Workers (EPWs) will be incorporated into the merged scheme, however, the form this will take has yet to be confirmed.
Subsidised Expenditure Will Qualify
The SME regime has long restricted taxpayers from including ‘subsidised’ expenditure in their R&D tax relief claims, a policy outlined in section 1053 of the Corporation Tax Act 2009. Draft legislation published in July 2023 hinted that the restriction would carry over into the merged scheme, however The Chancellor has backtracked and removed this restriction from the policy framework. This is great news, especially for taxpayers who receive grants or receive funds from clients/investors to carry out their R&D projects.
Contracted Out R&D
Under the merged scheme, where a company with a qualifying R&D project subcontracts the work to a third party, the party contracting out the work is the company that may claim for the qualifying costs of the contract. In other words, those who initiate, manage, and bear the risk of an R&D project may claim for the contracted R&D activity. There are edge cases where a contractor may be able to claim for qualifying costs, such as if the work contracted out does not constitute R&D in the first instance. It is worth noting that subcontractors who undertake R&D activity on behalf of a company contracting out the work cannot claim for the same activities as this would result in double claims.
Agency Agreements and Nominee Arrangements
We have long warned taxpayers about the pitfalls of signing agency contracts (64-8 forms etc) when working with the tax agents which transfer major powers and rights from taxpayers to third parties. Such arrangements nominate a tax agent or advisor to legally receive and retain the total cash payment from HMRC who then forward the sum to the taxpayer, less any fees or commission. The government has removed the use of nominations for R&D tax credit payments which will stop payments being made to third parties, with the payments going directly to claimants. The change on nominations will take effect for all claims to payable R&D tax credits made on or after 1 April 2024. The restriction on new assignments will apply in relation to assignments made on or after 22 November 2023. This is fantastic news that will hand control to taxpayers and restrict the use of nominee bank accounts by unscrupulous tax agents who have tarred the reputation of the R&D tax regime over the last few years.
The SME Scheme Lives On for Loss-Making ‘R&D Intensive SMEs’
Although the merged scheme spells the end of the two-tier R&D system for the vast majority of companies, access to enhanced reliefs under the SME scheme will continue for loss-making businesses that are ‘R&D intensive’. HMRC calculates R&D intensity as the proportion of an SME’s qualifying R&D expenditure compared to its total spending within the accounting period.
- The 40% intensity threshold announced at Spring Budget 2023 has been reduced to 30% for periods beginning on or after 1 April 2024; this broadens eligibility for thousands of UK businesses who invest heavily in R&D.
- Claimants will benefit from an enhanced deduction of 86% and a repayable credit of 14.5% and, unliked the merged scheme, the credit will not be subject to corporation tax.
- Large companies, profit-making SMEs, non-R&D intensive loss-making businesses will not qualify for the revised SME scheme and must use the new merged R&D scheme.
The Future Outlook for R&D
The announcement of the merged R&D tax scheme paints a promising picture for the future of R&D in the UK and should buoy the confidence of innovative businesses in a wide range of sectors. After years of uncertainty, the structural reforms announced in The Autumn Statement 2023 will simplify the regime and remove unnecessary bureaucracy and restrictions that have hampered access to the schemes in the past. The R&D tax reforms and support measures signal that the UK is maintaining its long-term commitment to domestic innovation and technological advancement, ensuring that the UK remains at the forefront of technological and scientific progress.
Capital Allowances – Full Expensing Made Permanent
At Spring Budget 2023, the government announced full expensing from 1 April 2023 to 31 March 2026 and has since clarified that full expensing will be made permanent, thus replacing the super-deduction scheme. Full expensing enables UK businesses who have exceeded their £1m Annual Investment Allowance (AIA) to deduct 100% of qualifying capital equipment costs from their profits in the year the costs are incurred. The change gives much needed clarity to businesses who can now make long-term investment decisions and have certainty as to the tax relief they will receive.
How Cost Care Tax Can Help
The new merged R&D scheme and associated structural reforms provide much needed clarity and may bring many SMEs into the scope of the R&D tax relief regime. If you have any questions about the reforms or want to discuss your eligibility with one of our tax experts, call us today for a no obligation exploratory conversation.