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scientists studying with microscopes | accountingweb | R&D reform – the devil in the detail

The devil is in the R&D-reform detail


The Finance Bill contains a few surprises regarding the new research and development relief rules. Emma Rawson takes a closer look.

5th Dec 2023
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On Autumn Statement day, the Chancellor confirmed that plans to reform the existing research and development (R&D) relief schemes, including the introduction of a new merged scheme, will go ahead. The Finance Bill introducing these changes has now been published, and working through the legislation uncovers some interesting details.

April 2024, or not?

In his Autumn Statement speech, the Chancellor stated (to the dismay of many stakeholders) that the new merged scheme would be introduced from April 2024. This leaves a highly ambitious window of less than five months for legislation to be finalised, and businesses, agents and HMRC to get up to speed. 

The accompanying policy paper also appears to confirm that the new scheme would apply to accounting periods beginning on or after 1 April 2024. However, the Finance Bill paints a slightly different picture. 

The commencement provisions tucked away at the end of schedule 1 do not refer to April 2024 at all. Instead, paragraph 16 states that the new scheme will apply to accounting periods beginning on or after the “appointed day”, which will be confirmed by the Treasury in regulations.

Given the previous, apparently clear statements that the scheme will come in from 1 April 2024, it is interesting that this date is not included in the primary legislation. Is this simply an oversight? Or could it be a way for HMRC and HM Treasury to keep their options open should they realise that April 2024 is too much of an ask?

While I don’t think we should get our hopes up too much, it’s tempting to think that the door might not yet have closed on a delay. 

R&D-intensive SMEs

At the Spring Budget, the Chancellor announced that cuts in the level of relief under the small or medium-sized enterprise (SME) scheme would be partially reversed “R&D-intensive” SMEs from April 2023. 

The Finance Bill legislation confirms that this enhanced relief will not be incorporated into the new merged scheme. Instead, the current SME scheme will be kept open, but only for loss-making companies (or those with pre-trading expenditure) that qualify as R&D intensive. Profit making R&D-intensive companies, and those that don’t meet the threshold to be R&D intensive, will only be able to claim under the new, merged scheme.

To qualify as R&D intensive, it was originally proposed that at least 40% of expenditure eligible for corporation tax relief would have to be spent on qualifying R&D. At the Autumn Statement, it was announced that this threshold would drop to 30%. 

Maintaining a completely separate scheme for the R&D intensive increases complexity, especially if companies risk moving in and out of two very different schemes as their expenditure fluctuates. The Finance Bill legislation does however provide for a grace period of one year, allowing companies to continue to claim under the R&D-intensive regime if they only temporarily dip below the threshold. This should help address the issue of companies having to move out of the regime due to a “one-off shock” such as an unexpected non-R&D expense, but won’t address difficulties with medium- to long-term planning.

The somewhat quirky commencement rules in schedule 1 also give an unexpected result for the R&D intensive regime. In effect, despite the Chancellor’s announcement that the threshold would be reduced to 30%, it remains at 40% for accounting periods that begin before the appointed day and end on or after 1 April 2023. 

This means that a company with a 31 March year end will have a threshold of 40% for the year ended 31 March 2024, but a threshold of 30% for the year ended 31 March 2025. This adds an extra layer of confusion to an already confusing scheme, and it’s unclear why the lower 30% threshold could not just be applied from day one.

Contracted-out R&D

Under both the merged scheme and the R&D-intensive scheme, expenditure on R&D “contracted out by the company” can qualify for relief. Conversely, a company can’t claim relief if the R&D it is undertaking has been contracted out to it. 

Whether or not R&D is contracted out will therefore be a key condition in determining who can claim relief. A new s1133 will be inserted into CTA 2009 to say that a person contracts out R&D if:

  • there is a contract
  • the activities undertaken to meet the obligations in that contract include R&D
  • it is reasonable to assume (based on the contract and surrounding circumstances) that the person intended or contemplated when entering into the contact that R&D would need to be undertaken. 

The last of these conditions is likely to be the key one, and the one that causes the most uncertainty. In particular the use of “reasonable to assume” and ”contemplated” could allow for a wide range of interpretations. It’s not unrealistic to see this becoming a future battleground between advisers and HMRC.

Final thoughts

The Finance Bill legislation answers some questions about the new scheme, but leaves others very much open. In particular, is an April 2024 commencement date truly set in stone? Hopefully we will see some clarity on this sooner rather than later, as the last thing we need in the world of R&D relief is more uncertainty.

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