Why the Autumn Statement is such good news for R&D tax relief
Despite a tough year for R&D tax relief in 2023, 2024 looks set to bring changes to the scheme that make things easier for tax advisers and their clients.
Well, 2023 certainly brought more than its fair share of doom and gloom about R&D tax relief. HMRC’s Compliance teams have been single-minded about denying relief anywhere they can, but there are encouraging signs that things will start to improve in the not-too-distant future.
For example, HMRC recently published its long-awaited ‘Guidelines for Compliance’. While these are pretty lengthy, they’re surprisingly positive in tone. In fact, many of the examples they use show that HMRC’s Policy team seems to be taking a fairly open and generous view of the programme. This seems very similar to their tone from a few years ago, when HMRC seemed much more open-minded about the types of projects that qualified.
The other significant piece of good news arrived in the Autumn Statement – or more accurately, the technical note that accompanied it. This clarified one of the most contentious parts of the SME scheme: whether companies can claim R&D tax relief when acting as a subcontractor. Before explaining the good news, let’s take a quick recap of how HMRC has viewed the issue for the last couple of years.
HMRC’s current approach
Scenario A is uncontentious. When your client is the company commissioning a subcontractor to perform part of its R&D project, your client can claim relief. The subcontractor isn’t allowed to claim, which prevents ‘double dipping’.
Scenario B, on the other hand, has been more problematic. This occurs when the customer instructs a subcontractor to provide a good or a service, and there is no mention of or apparent need for R&D. As far as the customer’s concerned, it’s routine work. In some cases, the subcontractor may decide to invest in its own R&D. This may be to make an advance in technology that can be used to satisfy its current contract and others like it in the future. The subcontractor typically takes the financial and technical risk of the speculative development, and it works independently from the customer on the side-project.
Unfortunately, HMRC has typically applied the rules from Scenario A to Scenario B. It tells the subcontractor “Sorry, you can’t claim because the R&D was contracted to you” and it tells the customer “Sorry, you can’t claim because you didn’t have an R&D project”. So, while R&D has clearly taken place, neither party can claim!
HMRC’s approach in the new, merged scheme
For accounting periods starting on or after 1 April 2024, things are going to be different as HMRC acknowledges the issues described above in Scenario B. Going forward, there will be three main scenarios to consider.
Scenario 1 – Customer is UK-taxpayer and decides to do R&D
This is pretty much identical to Scenario A. HMRC says that the company deciding to undertake the R&D gets to claim, which in this case is the customer. The subcontractor cannot claim.
Scenario 2 – Customer is non-UK taxpayer and decides to do R&D
In Scenario 2, HMRC is recognising that there are cases where it’s impossible for the customer to claim. For example, they could be based in a foreign country, or be a UK-based organisation that’s not subject to Corporation Tax (such as the Ministry of Defence). Where R&D has been contracted by an entity that can’t claim relief, the subcontractor is allowed to claim relief instead.
Scenario 3 – Subcontractor decides to undertake R&D
In Scenario 3, a customer (whether UK-based or not) engages a subcontractor to undertake some routine piece of work. This would usually be the delivery of a product or service. Nothing in the contract, or the surrounding business context, mentions the need for R&D. In some cases (probably a minority), the subcontractor may decide to invest in its own R&D. The results of that would typically be used not just to satisfy the contract it has with its customer, but also any similar contracts it may win in the future.
This is a huge step forward for HMRC. They finally recognise that subcontractors often have solid grounds on which to submit an R&D claim, even when they’re working for a customer.
The main problem right now is that the scenarios above relate only to accounting periods starting on or after 1 April 2024, and HMRC’s Compliance teams are continuing to cling to the current doctrine. If there’s a customer involved, the subcontractor cannot claim.
While HMRC is taking welcome steps towards a more pragmatic scheme that supports the companies who decide to do R&D, there’s still a huge amount of nuance and complexity for advisers to deal with. Even in the scenarios above, whether the customer or the subcontractor will be able to claim will come down to the wording of the contract and the surrounding circumstances and business context. So, unfortunately, advisors will still have to deal with a great deal of complexity even when all claims are made through the merged scheme.
But hey, that’s exactly why The R&D Community exists! It’s our job to turn complexity into clarity, and to create helpful, practical online courses and resources that help you to stay up to date and deliver the best possible service to your clients. If you’re at all interested in R&D tax relief, our monthly Newsletter is packed with juicy content you won’t find elsewhere. And if you’re ready to dive in and join our Community of R&D advisers, you can find all of the benefits available to members on our website.
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