Full steam ahead for R&D relief reformby
The Autumn Statement confirmed that the introduction of a new merged R&D relief scheme will go ahead from April 2024. Emma Rawson takes a closer look.
At today’s Autumn Statement, the Chancellor confirmed that a new merged R&D relief scheme will be introduced for accounting periods beginning on or after 1 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 rush to reform
Plans to merge the two current R&D tax relief schemes, the small and medium sized entities (SME) regime and R&D Expenditure Credit (RDEC) scheme, into a new, above the line credit ‘single scheme’ was first raised in 2021.
Apart from being billed as a simplification, the merger was proposed as a way to tackle abuse of the SME scheme, as well as aiming to address concerns that the SME scheme simply wasn’t delivering value for money.
It’s highly disappointing that, despite many calls for a delay, the government is ploughing ahead with an April 2024 launch.
The policy paper published on the day of the Autumn Statement stated, somewhat disingenuously, that having the new scheme apply to accounting periods beginning on or after 1 April 2024 is a delay compared to previous draft legislation (which indicated that the new regime would apply to expenditure incurred from that date).
However, businesses, agents and software providers will still struggle to put the required systems and processes in place in time. HMRC will also need to move quickly and carefully as those involved in R&D claims will be aware of the problems that have arisen in the past from even minor changes to the CT600L.
An April launch also doesn’t give sufficient time to assess whether recent changes, such as the introduction of the additional information and claim notification requirements, have had any impact on fraud and abuse before the new scheme comes in.
R&D intensive SMEs
At the Spring Budget 2023, the Chancellor announced that cuts in the level of relief under the SME scheme would be partially reversed for ‘R&D intensive’ SMEs.
To get into this elite club, it was proposed that at least 40% of expenditure eligible for corporation tax relief would have to be spent on qualifying R&D, a very high hurdle.
At the Autumn Statement it was announced this threshold would drop to 30%. However, this still only leaves around 25,000 companies who are likely to benefit.
When draft legislation for this enhanced relief was published, it was surprising to see that it would not simply be incorporated into the new merged scheme when that was launched.
Instead, the current SME scheme would be kept open, but only for those that qualified as ‘R&D intensive’. The Autumn Statement policy paper, in referring to there being two R&D schemes from April 2024 (the new merged scheme and the SME intensive scheme), appeared to indicate that the government is unfortunately sticking with this approach.
Keeping the SME scheme open in this way will counteract the simplification gains of having a new merged scheme. This will especially be the case if companies move in and out of the two schemes as their expenditure fluctuates around the 30% mark.
One welcome suggestion from the policy paper is that there will be a ‘grace period’ of one year, allowing claimants to drop below the threshold temporarily without having to leave the R&D intensive scheme. However, whilst this will go some way to helping matters, companies will still face medium to long term uncertainty as to which regime they will be in.
The policy paper confirmed changes to the treatment of subcontracted and subsidised R&D under the merged scheme.
It appears that we are moving away from the originally proposed strict line that, in subcontractor situations, only the company outsourcing R&D would be eligible to claim. Instead, whilst this will remain the general rule, the contractor carrying out the R&D may be able to claim if the work is initiated by them and does not form part of an R&D project for the customer.
Exactly who is entitled to claim in any scenario will depend upon the specific contract and commercial arrangements, something which is likely to keep R&D specialists busy going forward.
Off the back of this change, plans to bring the SME scheme rules on subsidised expenditure into the new merged scheme will be dropped. This welcome change means that a company receiving a grant towards its R&D, or having the cost met by another person, won’t necessarily miss out on relief. Hopefully it also means the end of arguments over what is and isn’t subsidised expenditure (as seen in the Quinn case and others).
Finally, the other change announced is that, if a company is loss making, the rate for calculating the notional tax under the merged scheme will be the 19% small profits rate, rather than the 25% main rate. This should give a small boost to loss making claimants but will increase the overall complexity of an already fairly complex scheme.
The rush to implement a new scheme is regrettable and will mean an uphill struggle for all involved. Given the fundamental nature of the changes proposed and the impact they may have on R&D activity in the UK, it would have been better to take more time and ensure that any new scheme is well designed and operates effectively for all sizes of business.
Ultimately, tax reliefs can only incentivise R&D if they are clear, and businesses have certainty as to how they will operate. The recent pace and scale of change means that, to date, this certainty has been limited or non-existent.
If there is one silver lining in this rush to reform, it may be that we finally get some much needed certainty and stability.
Visit our dedicated Autumn Statement 2023 hub here to find all related articles from our experts.
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Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining...