Introduction
The greatly anticipated change to the R&D legislation has arrived through a back drop of falling interest and inflation however they still remain high. The Chancellor presented the 2023 Autumn statement which included tax cuts, changes to National Insurance and from 1st April 2024 the merger of the Research and Development Expenditure Credit (RDEC) and Small or Medium Enterprise (SME) tax relief regimes. This has been stable for many other nations for a while now and we were going to be like Canada and the US to adapt a single R&D tax relief scheme. Also mentioned is that more companies will be eligible for the R&D intensive loss-making SME scheme.
The following section highlights what the current rules are and the key changes that will be made.
Comparisons between the current and merged R&D Tax schemes.
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Topic
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Current R&D Tax scheme
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New R&D Tax Scheme
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Types of scheme
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RDEC regime is applicable to Large companies or SMEs who undertake externally (i.e. customer or grant) funded projects. SME regime is applicable to SMEs who undertake internally funded projects.
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For accounting periods beginning on or after 1 April 2024, a single merged scheme will take effect which is applicable to both SMEs and Large companies, except for loss-making R&D-intensive SMEs where they will claim under a separate scheme which has a more generous claim benefit (see details in the section below). For loss-making R&D-intensive SMEs, the scheme will continue to operate based on the current super-deduction (rather than the above-the-line) scheme. The R&D intensity threshold is 30%, meaning that the proportion of qualifying R&D expenditure needs to account for at least 30% of the total expenditure incurred in the claim period. HMRC is conscious that undertaking consistent intensive R&D may not be possible in some cases, hence a ‘year of grace’ will be introduced to claimants that fall beneath the 30% threshold in a particular year due to a one-off event, as long as they were ‘R&D-intensive’ in the previous accounting period. This is indeed welcoming news for the SMEs that are undertaking genuine R&D.
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Headline rate for net claim benefit
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RDEC scheme – Until 31 March 2023, the net (i.e. after tax) benefit was 10.53% (based on 13% of credit rate and 19% of corporation tax rate); from 1 April 2023, the net benefit is 15%-16.2% (based on 20% of credit rate and 19%-25% of corporation tax rate). SME scheme – Until 31 March 2023, the benefit was 18.85%-33.35% (based on 130% of enhanced deduction on the qualifying R&D expenditure and 14.5% of SME repayable tax credit); from 1 April 2023, the benefit is 8.6%-21.5% (based on 86% of enhanced deduction on the qualifying R&D expenditure and 10% of SME repayable tax credit).
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15%-16.2% (based on 20% of credit rate and 19% of corporation tax rate if the claimant is loss making or has a profit of less than £50k, and 25% of corporation tax rate if the claimant has over a profit of £250k; a tapered corporation tax rate applies for claimants with a profit between £50k and £250k). For loss-making R&D-intensive SMEs, the net claim benefit will be 27% (based on 86% of enhanced deduction on the qualifying R&D expenditure and 14.5% of SME repayable tax credit). In addition, the current SME scheme restrictions in relation to subsidised R&D will be removed from the R&D-intensive SME regime. This means that, where R&D is funded by customers or innovation grants (as opposed to being internally funded), the claim can still be made under the new R&D-intensive SME regime (and not under RDEC scheme anymore).
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Subcontractor costs
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Under the current SME scheme, claimants can claim payments made to subcontractors, as long as the project in concern was internally funded (rather than outsourced to the claimant by customers / subsidised by R&D grants). Under the current RDEC scheme however, companies cannot claim subcontractor costs unless the subcontractors are qualifying bodies (e.g. universities, scientific research organisations, NHS etc. which are not subject to UK corporation tax)
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The subcontracted R&D rules in the merged scheme will be modelled on the existing SME scheme rules (i.e. relief will be available to the company that takes the decision to initiate the R&D and bears the risk). Therefore for large companies, the current rule restricting them from claiming subcontractor costs (unless the payments were made to a qualifying body) will be eliminated.
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Overseas labour costs incurred in supporting the claimant’s R&D project activities
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The amounts can be claimed if they were recharged to the UK claimant entity in the period in concern and were incurred in R&D.
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The amounts will not be claimable (only activities performed in the UK can be allowed), except where it is wholly unreasonable to undertake the R&D activities in the UK due to, for example, geological reasons or the scientific/technological nature of the project. Payments made to UK Externally Provided Workers (i.e. contractors) or subcontractors, who are paid through a UK payroll, can still be claimed though. This rule is aimed to retain R&D in the UK.
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PAYE/NIC cap (which affects how much cash credit can be claimed)
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SME PAYE/NIC cap is calculated as £20k plus 3 times the claimant’s total PAYE/NI liability in the claim period. the employees of the company who are engaged on R&D activity and; any externally provided workers who are provided to the company by another UK connected group company for the purposes of qualifying R&D of the claimant.
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The more generous PAYE/NIC cap from the current SME regime will continue to be used (see description on the left).
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Removing nominations and voiding assignments
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HMRC may be able to pay the R&D expenditure credit or R&D tax credit to a third party recipient other than the claimant company, upon request of the claimant company (a practice used by some advisers).
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From 1 April 2024, R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments, subject to limited exceptions. In addition, no new assignments of R&D tax credits will be possible from 22 November 2023. This means that, in most circumstances, payments of R&D tax reliefs will be paid directly to the company that claims for the R&D, ensuring they have full oversight of the claim, and receive payment more quickly. This has been legislated in the Autumn Finance Bill 2023.
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Summary
The merged regime overall simplifies the R&D legislation as it is taking the best of the current RDEC and SME schemes and bringing them together. In practical terms, the new merged scheme is modelled based on the current RDEC regime, being an above the line tax credit scheme, this is no doubt more attractive than the current SME super-deduction scheme.
If your company previously falls into the RDEC scheme, it benefits from the change because of the increased rate and the removal of the restriction on paying limited company subcontractors. Loss making and organisations with small profits (less than£50k) are also benefiting from a more generous nominal tax rate (remained at 19% rather than rising up to 25%). Although SMEs will now get a decrease in the percentage which can be claimed, if you are a loss making SME that is heavily investing in innovation (i.e. ‘R&D intensive’), the benefit is 27% which will still mean a great deal to companies (especially start-ups) in need of cash.
The main shift of the scheme is mostly caused by an increasing amount of fraudulent claims made by SMEs in particular. As this number decreases and R&D tax relief program matures, there might be other changes to the scheme in the future. To further reduce abuse of the scheme, the Additional Information Form (AIF) has been introduced as a mandatory supporting document. This increased effort and added scrutiny should weed out organisations who were making claims fraudulently.
All these changes in eligibility rules and filing requirement mean that careful planning on your R&D roadmap is needed so as to continue to benefit from the UK tax relief scheme. If your business needs help to navigate these changes, our team of experts can help ensure you follow the latest updates, and include the correct expenditure, documentation and activity for a robust and complete R&D claim. This is particularly important as HMRC explores new ways to clamp down on non-compliance.
