Autumn Statement 2023 - Merging R&D tax relief schemes

Merger of RDEC and SME scheme

The big announcement within the autumn statement is that the Treasury intends to take the previously separated RDEC and SME schemes and amalgamate them into a single framework, in a move aimed at simplifying the scheme. This new measure introduces a single framework, which enables an above-the-line credit for all.

Consolidating these schemes establishes a unified set of rules and criteria, meant to combine the best elements of both schemes to benefit all sizes of businesses. The rate offered under the merged scheme is introduced at the current RDEC rate of 20%. The national tax rate applied to loss-makers in the merged scheme will be the small profits rate of 19% rather than the 25% main rate set in the RDEC. The merger will likely result in a further reduction in claim value for many SMEs. This change will be introduced for accounting periods beginning on or after 1 April 2024.

Contracted-out R&D

The biggest uncertainty introduced by the merged scheme is the significant changes for contracted-out R&D. Under the merged scheme, the company that initiates, manages, and bears the financial risk of an R&D project can claim relief for contracted tasks. In a change to the initial draft legislation, the Treasury is indicating there will be a change that ensures that the instigator of the innovator can access tax relief, even where the claimant is performing or undertaking outsourcing activities. Therefore, in most cases the sub-contracted R&D expenditure will be claimed for by the contractor, not the subcontractor who employs the staff undertaking the outsourced R&D.

In this situation, the subcontractor will be excluded from the R&D tax credits scheme. This change will upend the current scheme that rewards the doer rather than the payer and will push more of the benefit into the hands of large companies. This is major blow for those companies that currently undertake contracted out R&D for larger businesses, and who will have invested in talented staff employed in the UK. The Treasury are confident that the trickle-down benefits of rewarding the R&D contractor will outweigh the reduction in benefit to subcontractors. 

Overseas restriction

As expected, the restriction of overseas expenditure will be introduced on 1 April 2024. In general, companies will only be able to claim for expenditure associated with UK based R&D activities. It’s unclear how the exemptions to this restriction will be implemented and whether businesses forced to undertake work overseas for regulatory or environmental purposes will retain the ability to claim for these costs. Businesses need to be planning for this change and deciding whether to onshore overseas costs or whether to access R&D incentives outside of the UK. 

Subsidised expenditure 

As a result of changes to the contracted-out rule, the legislation relating to the subsidised expenditure has been removed. Therefore, R&D relief will be available to companies that have R&D projects which have been subsidised or grant funded. The subsidised expenditure will not be restricted in the merged scheme, and the benefit will not be reduced on subsidised expenditure. However, this does force the recipient of a grant or subsidy to carefully check whether they might be tripping aid intensity rules, or whether there might be a claw back of the R&D claim benefit within their grant contract.

Intensive SME scheme

Alongside the merged scheme, a new scheme for loss-making SMEs conducting intensive R&D has also been announced with an enhanced tax credit of 14.5%. This will remain as a stand-alone scheme based on the old SME scheme. The R&D intensity threshold has been reduced from the previously stated 40% of total expenditure down to 30% for accounting periods beginning on or after 1 April 2024, which is estimated to enable an additional 5,000 companies to access the enhanced scheme. A one-year grace period will be applied where a company’s R&D intensity falls below 30%. However, confusingly, the 40% threshold applied for expenditure incurred after 1 April 2023 (and cannot be claimed until Finance Act 2024 is given Royal Asset), whereas the 30% threshold applies to accounting periods beginning on or after 1 April 2024. But for SME’s who believe they could fall under this scheme, early planning for the R&D claim using budgeted figures is recommended to avoid a nasty surprise once the final claim is produced.

Further action on R&D fraud

The continuing crackdown on levels of fraud within the R&D scheme is not expected to stop. The government has been clear that the current level of non-compliance within the relief is unacceptable and HMRC is preparing to publish an R&D compliance action plan to further reduce levels of non-compliance. In addition, due to the high proportion of fraudulent or fraud-adjacent R&D claims using nominee bank accounts, there is an immediate ban preventing a third party, such as the R&D agent, in receiving the tax refund or R&D tax credit. 

Our thoughts

Although the introduction of the merged scheme is designed to be a much-needed simplification of the R&D scheme, the R&D tax relief will remain a complex landscape with two schemes running alongside each other. Our concern is that, in merging the schemes, the government has added significant uncertainty and complications for future claim periods. There remain many areas where the rules are tricky to navigate, and companies will need to tread carefully not to slip up and make a mistake. Hopefully, the merged scheme will be the end of the reductions in benefit SMEs, and we will see some stability for more than rushing changes in from year to year. 

Loss making SME claimants have seen the rate of benefit drop from a credit equal to 33.3% to just 18.6% over a couple of years, which sending mixed messaged about the governments support for innovative scale up and established firms. Now is the time for businesses to start budgeting for these changes and looking at their R&D strategy to cope with the merged scheme. The legislation will undoubtedly result is some significant winners and losers, but it’s better to know in advance of preparing your first merged scheme claim. 

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