Autumn Statement November 2023 – merged RDEC scheme and SME intensive scheme
Overview
Following on from announcements earlier this year and draft legislation published in July, the Autumn Statement confirmed that the Government is moving ahead with significant changes to the R&D tax relief regimes in the UK:
- a merged R&D Expenditure Credit (RDEC) scheme for both SMEs and large companies will come into effect for accounting periods beginning on or after 1 April 2024
- a scheme for R&D-intensive SMEs takes effect for expenditure incurred from 1 April 2023 (‘SME intensives scheme’)
The changes aim to simplify and improve the regimes, which have been the subject of much scrutiny and increased HMRC compliance activities over the last 12 – 18 months, in response to high levels of fraud and error identified within submitted claims.
The Autumn Finance Bill 2023 will cover the detail later in the year, but in the meantime a technical note has been issued, addressing the changes to the proposed design. These changes follow on from a technical consultation period and the House of Lords Economic Affairs Sub-Committee Call for Evidence which has been running throughout October and November, and which we were invited to attend in person.
Merged R&D Expenditure Credit scheme
We are pleased to see some significant changes to the proposed structure of the regime following feedback from claimants, industry and practitioners. The highlights:
Decision-makers to get the benefit – The company making the decision to undertake R&D and who bears the risk of that activity will be rewarded with access to R&D relief in respect of that effort. Further, allowing that decision maker to claim relief on work contracted out to other parties means that relief is afforded to the company bearing the risk of the project as a whole. So, who will be able to claim relief?
- Where Company A, with a valid R&D project, contracts a third party, Company B, to undertake some of the (eligible) work connected with their R&D project, Company A may claim the relevant (qualifying) costs of that contract. Company B may not claim for R&D activities which delivers the project outcome for another company’s project.
- Where Company B is contracted to do work for Company A, but the work does not form part of an R&D project for Company A and was instead initiated by Company B, then Company B can claim relief for their work, as long as they meet the requirements of having valid R&D which is otherwise eligible for tax relief.
In general this means that if a company is contracted to provide a product or service which is not R&D, such as constructing a building or a software product, if they undertake R&D in delivering that product or service, they would be able to claim relief even though they are undertaking R&D on an activity contracted to them. The exact details of who should claim the relief will depend on the specific contract and will be based on who initiates the R&D activity and bears the risks involved. Contracted R&D carried out by subcontractors who are working for non-UK corporation taxpayers, such as overseas companies, will continue to qualify for relief regardless.
This is a hugely welcome change which also resolves an anomaly existing within the current regime where in some cases neither the party undertaking the R&D nor the company paying for it can access relief. It also means that companies currently claiming RDEC will in the future be able to include their subcontracted R&D costs, which will represent a significant increase in the available relief in many cases.
Subsidised expenditure – All rules relating to subsidised expenditure, which currently exist within the SME regime, will be removed from the legislation for the merged RDEC scheme.
Payments under the merged RDEC scheme – Payments made in respect of claims under the merged scheme will be subject to the same restriction as for the current RDEC scheme, being reduced via a ‘notional tax’ for loss-makers so that the amount of benefit for profit-making and loss-making entities is similar. This notional tax withheld is available to use against future corporation tax liabilities of the business.
Commencement date – The Government has recognised the need to allow time for businesses to understand the changes, and also to avoid having two differing regimes in place for a claimant company in a single accounting period, so there has been a slight delay in the timing with the scheme becoming effective for accounting periods beginning on or after 1 April 2024.
SME intensive scheme
Announced at Spring Budget, the SME intensive scheme comes into effect for expenditure incurred from 1 April 2023 for companies considered to be ‘R&D intensive’. The Autumn Statement brings some changes to the expectations for this scheme, the key points being:
- the threshold for ‘R&D intensive’ is reduced from 40% of total expenditure to 30%
- provisions will be introduced to address the concern about fluctuations in intensity, allowing a company to claim under the intensive scheme for a further year where it moves below the threshold
- the provisions relating to contracted out R&D will apply equally to the SME intensive scheme as set out above for the merged RDEC scheme, for accounting periods beginning on or after 1 April 2024
- rules relating to subsidised expenditure will be removed from the SME intensive scheme for accounting periods beginning on or after 1 April 2024.
Non compliance
The Government also noted that further action may be needed to reduce the unacceptably high levels of non-compliance within R&D tax relief claims and is due to publish a ‘compliance action plan’ in due course. Commentary on current HMRC compliance activities in this space is rife, with professional bodies and practitioners becoming increasingly vocal about the extent to which HMRC actions are in keeping with their Charter and whether or not the approach taken is tackling the problem in a way which avoids penalising genuine claimants. With the overall aim being to recognise that R&D drives innovation and economic growth, and to deliver an incentive regime that is both fit for purpose and sustainable, we hope that this plan is well-designed and enables genuine claims to be processed efficiently such that support is directed to where it is needed as quickly as possible.
The detail
The technical note published following on from the Autumn Statement 2023 can be found in full at the following link:
