Autumn Statement: Move to merged R&D tax relief regime confirmed

The current RDEC and SME regimes will be merged and there will also be an enhanced regime for R&D intensive SMEs

New R&D tax credit regime from 1 April 2024

The Government confirmed it will go ahead with the introduction of a single merged ‘research and development expenditure credit (RDEC)-like’ scheme with all companies, regardless of size, receiving an above the line credit (although there is an exception for R&D intensive small and medium-sized enterprises (SMEs)). This will apply to accounting periods beginning on or after 1 April 2024, rather than the previously announced intention to bring in these changes for expenditure incurred from 1 April 2024. The Chancellor also announced a reduction in the R&D intensity threshold for a loss-making SME to qualify as R&D intensive. As proposed in the summer, the rules on subcontracted R&D will broadly follow those in the current SME regime, although the definition of subcontracted R&D appears to be narrower. For companies currently claiming under the RDEC regime, this means a significant change in who gets to claim the R&D. More details are included in this article.

Merged R&D tax credit regime

  • A 20 percent credit rate in line with the current RDEC regime;
  • For loss-makers, the notional tax rate applied to the R&D credit will be the small profits rate of 19 percent rather than 25 percent. This will mean the net benefit to profit makers is 15 percent, whereas loss-makers will receive a net benefit of 16.2 percent;
  • The merged scheme will not employ the subsidised R&D restrictions from the current SME regime. Consequently, where a company’s R&D costs are subsidised, either via grant funding or R&D is funded by another person, there will no longer be the requirement to reduce the relief available to the company (subject to the contracting out rules outlined below);
  • The merged scheme will adopt the more generous PAYE/NIC cap from the current SME regime; and
  • For large entities the new rules enabling claims for subcontracted out R&D expenditure means the existing rules for qualifying bodies will be removed.

Subcontracted R&D rules under the merged regime

The most significant difference between the current RDEC regime and the merged regime is in relation to the rules around subcontracted R&D. Where a company sits in the supply chain, and the means by which it contracts with third parties to undertake R&D will determine who can access the R&D tax incentive. Companies will need to consider the impact of these changes on existing claims.

The subcontracted R&D rules will be modelled on the existing SME scheme rules with an intention to apply the rules in a more focussed manner under the merged regime. We await the publication of the proposed legislation but based on the announcements it appears the intention is for the rules to work as follows:

  • Where company X (the customer) subcontracts R&D to a third party (company Y - the subcontractor), it will be company X that is able to make the claim on this subcontracted out R&D expenditure. Company Y (the subcontractor) will not be able to make a claim for this expenditure unless company X is not subject to UK corporation tax, e.g as an overseas company. This change will significantly benefit claimants that currently subcontract out a large proportion of their R&D;
  • However, if company Y (subcontractor) enters into a contract for services or goods with a company X (the customer), e.g. to construct a building or deliver a software platform, and company Y initiates the R&D as part of its own project, it is company Y that can claim and company X has no claim; and
  • An assessment will need to be conducted on a case-by-case basis to determine which party is entitled to make a claim in such commercial arrangements. There is likely to be a particular focus on whether specific R&D activities have been subcontracted where a contract also covers the provision of goods and/or wider services. We recommend that businesses consider the impact of the rules on their future claims and look out for the publication of further draft legislation for more clarity on how the rules will apply to them.  

Loss-making and R&D-Intensive SMEs

One exception to this merged scheme for loss-making R&D intensive SMEs was previously announced at the Spring Budget. Following consultation, the R&D intensity threshold (proportion of qualifying R&D expenditure compared to total expenditure) to qualify as an R&D-intensive SME has been reduced from 40 to 30 percent for accounting periods beginning on or after 1 April 2024. Eligible companies will continue to receive an 86 percent enhanced deduction on their qualifying R&D expenditure and will be able to claim a repayable tax credit of 14.5 percent. The current SME scheme restrictions in relation to subsidised R&D will also be removed from the R&D-intensive SME regime for accounting periods beginning on or after 1 April 2024. In addition, a ‘year of grace’ will be available to claimants which were ‘R&D-intensive’ in the previous accounting period but fall beneath this threshold due to a one-off event which will be welcome news for R&D intensive SMEs.

The Government has stated that it will continue working with businesses to develop this enhanced relief. 

Other measures

Additional measures were also introduced to ensure payments go directly to claimants as opposed to any third parties. The Government has also stated that further action may need be needed to reduce abuse of the regimes and is due to publish a compliance action plan. This is in the context of a large increase in existing HMRC enquiry activity and recent changes to increase the amount of compliance required to support R&D claims.