Autumn Statement changes to the R&D tax relief regime - simplification or complexity?

The Autumn Statement contained several further announcements on R&D tax relief. Whilst the reforms are aimed at simplifying the R&D tax relief regime, the reality is that constant changes (in sequential Budgets and Statements) are adding layers of complexity, introducing potential traps, and will result in most SME claimants receiving less R&D tax relief than previously.

Merging of the two R&D tax credit schemes

The Chancellor confirmed that the merging of the SME and RDEC schemes will go ahead. The new merged scheme will be based on the R&D Expenditure Credit (“RDEC”) scheme. Accounting for the RDEC is complex, but for profitable companies the RDEC benefit equates to tax relief of between £15 and £16.20 for every £100 of qualifying R&D expenditure, with the precise level of benefit dependent on profitability.

A further change was announced yesterday which will mean that loss making companies can benefit at the higher rate above and can claim a cash repayment of £16.20 for every £100 of qualifying R&D expenditure.

The implementation of these changes will come into effect for accounting periods commencing on or after 1 April 2024.

There was also “clarification” as to who will claim R&D tax relief when dealing with subcontractors under the new merged scheme. Broadly, it will be the “decision maker company” who asks the third party to do the work for them, rather than the 3rd party themselves, who will be able to claim the R&D tax relief. Whilst this may seem simple enough, in practice the position will frequently be more complex.

Merged but not merged

Loss making “R&D intensive” SMEs will, in effect, continue to claim under the pre-merged rules. This will be known as the “SME Intensive Scheme” and provides an 86% uplift on qualifying costs, with a surrender value for loss making companies at 14.5%. This means that loss making companies can claim a cash repayment of £26.97 for every £100 of qualifying R&D expenditure.

For expenditure from 1 April 2023, an R&D intensive SME is defined as one spending at least 40% of their total expenditure on qualifying R&D activities. The Chancellor announced this ratio will drop to 30% for accounting periods beginning on or after 1 April 2024, with a one-year grace period if companies temporarily drop below the threshold. This will mean more companies can qualify under the SME Intensive Scheme.

Additionally, the government intends to drop restrictions relating to subsidised expenditure from the SME Intensive scheme.

Winners and losers

Extensive tax regime changes always lead to winners and losers. Under the above proposals, it appears that the losers include SME’s who are contracted to undertake R&D activities by large corporates and who will no longer be eligible to make a claim to R&D tax relief. On the other hand, R&D intensive SMEs who receive subsidies look set to benefit from a higher rate of relief than before.

Overall though, the majority of SMEs will receive significantly less R&D tax relief benefit on expenditure incurred on or after the 1 April 2023, and an initial high-level cost (to make a claim) versus benefit assessment is more important than ever.  

And finally

Claimants also need to be aware that there are other previously announced changes which are set to come into force for expenditure from 1 April 2024, including:

• Restrictions meaning that most activities subcontracted to non-UK entities will no longer qualify.
• Restriction to refunds modelled on the current SME Cap (i.e. linked to PAYE/NIC payments)

In conclusion, in the short term at least, the march to simplicity and accountability is leading to additional complex R&D tax relief rules. These proposals also sit alongside the new compulsory requirements on advance notification and the submission of an Additional Information Form in advance of making a formal R&D claim, both of which add additional compliance burdens.

The Government has also stated that “further action may be needed to reduce the unacceptably high levels of non-compliance in the R&D reliefs” and will publish a compliance action plan. It is widely reported that HMRC’s current approach to enquiries is already deterring genuine claimants. Therefore, we hope that any action plan is proportionate and does not further deter legitimate R&D claimants.    

James Cowper Kreston have an experienced team of corporation tax specialists who assist innovative companies with their R&D tax relief claims. If you would like to learn more or need assistance with your R&D tax relief claim, please get in touch.