Further Research and Development reform – Autumn Statement 2023

Published by Sam Jones on 22 November 2023

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It’s no surprise that today’s Autumn Statement announced further R&D reform. The government will introduce legislation in the Autumn Finance Bill 2023 to merge the current Research and Development expenditure credit (RDEC) and Research and Development (R&D) SME schemes for accounting periods beginning on or after 1 April 2024.

Currently there are two separate schemes for claiming R&D relief depending on the claimant’s size and how the project has been funded, being the SME scheme and the RDEC scheme.

What do we know about the merged scheme?

The mechanics of the merged scheme will be based on the RDEC scheme i.e. an above the line credit, as opposed to the enhanced deduction offered by the SME scheme. The rate offered under the merged scheme will be implemented at the current RDEC rate of 20%.

The notional tax rate applied to loss-makers in the merged scheme will be at the small profit rate of 19%, rather than the 25% main rate set in the current RDEC scheme.

The previously announced restrictions on relief for overseas expenditure will form part of the merged scheme and will continue as planned to be applicable for accounting periods beginning on or after 1 April 2024.

It will be interesting to see how the merged scheme deals with contracted-out R&D. The HMRC impact note states that the new rules will combine the existing rules, but we await the details to analyse the impact of this comment in any detail, who can continue to claim and who will lose out?

The more generous PAYE/NI cap applied to the current SME scheme will apply under the merged scheme (currently £20,000 plus 300% of the company’s total PAYE/NI liability).

How have SME’s been impacted by changes to R&D rates?

Historically, the SME scheme has been almost lavish by international standards. Jeremy Hunt has previously stated that he is concerned it is not working as it should be to encourage R&D – although perhaps he just concerned that it is too expensive.

SME’s have seen the R&D tax relief available reduce in value and today’s announcement is no different. Let’s recap, for R&D expenditure up until 1 April 2023, a loss-making company could claim a tax credit worth up to 33.35p per £1 spent on qualifying R&D – but since 1 April 2023, this tax credit reduced to 18.6p per £1 spent on qualifying R&D – a reduction of approximately 44%.

Under the merged scheme, the 20% credit is a taxable, therefore the effective tax saving is net of the CT rate, being 25% for main rate taxpayers and 19% for those within the small profits rate. The RDEC is currently worth 15p per £1 spent on qualifying R&D and it will be worth up 16.2p for a loss-making company.

R&D incentives for SME companies have halved over the past couple of years, is it still worth making a claim?

R&D intensive companies

The Government is adamant they want to continue to incentivise loss making R&D intensive companies to continue to claim under the SME scheme. The Autumn Statement announced the SME R&D intensity threshold announced in the Spring will be reduced from 40% to 30% for accounting periods beginning on or after 1 April 2024. The R&D intensity threshold is calculated as qualifying R&D expenditure over the company’s total expenditure.

This will mean that a loss-making R&D intensive SME company will not fall into the merged scheme but will continue to claim the enhanced deduction at 86% and be able to claim the repayable tax credit from HMRC at 14.5%, an effective tax saving of 26.97p per £1 spent on qualifying R&D.

Profit-making SMEs and non-R&D intensive loss-makers will, for accounting periods beginning on or after 1 April 2024, will form part of the new merged R&D scheme.

Sam Jones, Corporate Tax Partner at Kreston Reeves, comments: “We really hope that today’s announcements are the final changes to the R&D landscape, so companies can assess what R&D looks like for them in the future and we look forward to analysing the detail when this is available”.

Our Autumn Statement 2023 question time webinar is now available to watch on-demand. During the webinar, our panel of tax and business experts came together to examine the changes unveiled by the Chancellor, and to answer your questions. Click here to watch the webinar.

Alternatively, if you would like any further information or guidance on this topic, get in touch with your usual Kreston Reeves contact or contact us here.

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