By Dan Jones, Tax Partner
The Autumn Statement 2023 introduces pivotal changes to the UK's R&D tax relief system, a system already under considerable pressure. Increased compliance activities, abuse by rogue R&D boutiques and a general lack of clarity and understanding in guidance have created a challenging environment for businesses engaged in claiming R&D Tax Relief. These new reforms, while aimed at streamlining and enhancing support for innovation, add further layers of complexity. It is crucial, now more than ever, for businesses to navigate these changes carefully, understanding the nuances of the reforms to effectively leverage the evolving support landscape.
The big merge and its timing quirks
So, what's the big news? The government has decided to merge the SME and Research Development Expenditure Credit (RDEC) schemes into this new, single scheme, set to kick in for accounting periods beginning on or after 1 April 2024. This move is all about simplification, but it does raise an eyebrow. The idea has been in the air since 2021 and while it's pegged as a way to make things easier, it's also a knee jerk response to the abuse of the SME scheme that's been widely reported over the last couple of years. But with less than five months to go until the launch (albeit it won’t affect submissions for a while), it's a race against time for businesses, agents and HMRC to get their ducks in a row, after yet more changes!
If, as is expected, the headline rate of relief under the new merged scheme remains at 20%, then the resulting net tax benefit for claimants will be either 15% or 16.2% (for loss making companies).
R&D intensive SMEs – still in the game
On a brighter note, there's some relief for 'R&D intensive' SMEs. Originally, to get into this elite club, companies had to spend at least 40% of their expenditure on qualifying R&D – quite a hurdle, right? Well, the threshold has now been sensibly lowered to 30%. That's a relief for about 25,000 companies, but it does mean keeping the current SME scheme open just for them, which does seem to muddy the waters of 'simplification'. SMEs who qualify for this regime will receive a net tax benefit of 27%, which is considerably higher than the benefits under the new merged scheme.
Subcontracting and subsidised R&D – a twist in the tale
And here's a bit of good news on subcontracting. We're veering away from the strict rule that was proposed, meaning only the company outsourcing R&D could claim relief. Now, the contractor doing the R&D might also be able to claim, provided the work is initiated by them and isn't part of an R&D project for the customer. The change to the new scheme also means the end of the confusion over what's considered subsidised expenditure, as allowances have now been made for companies to claim when they have received grant income towards projects, amongst others.
A little boost for loss-making companies
For loss-making companies, there's a small silver lining. The notional tax rate under the merged scheme will be the 19% small profits rate, not the 25% main rate. It's a small but significant boost, though it adds another layer of complexity to an already intricate scheme.
Your trusted guide through these changes
Navigating these changes isn't just about understanding the new rules; it's about strategizing to make the most of them. At Streets, our dedicated R&D tax relief team, are able to guide you through this transition, offering our expertise and support. We believe these changes, though challenging, are steps in the right direction, especially in addressing the misuse of the scheme.
Feeling a bit overwhelmed or just need some advice? Don't hesitate to get in touch with us. We're here to help you make sense of it all and find the best path forward for your business.
