R&D Tax Relief Changes – Tax Authorities

The government published draft legislation earlier this
year, for the merger of the RDEC and the SME R&D relief
schemes. In the Autumn Statement (November 22 2023) it was
announced that for periods commencing on or after 1 April 2024
there will be a single merged scheme; the proposed merged scheme
(SME and RDEC schemes) as well as an SME intensive
scheme.

Autumn Statement 2023 updates*

The Autumn Statement announced the merger of the small and
medium sized enterprises (SMEs) and the Research and Development
Expenditure Credit (“RDEC”) schemes.

Draft legislation on the merger of the schemes had previously
been published earlier this year with a view to enabling the
schemes to be merged from 1 April 2024, but there remained a lot of
speculation as to whether the change would be made as quickly as
the Government envisaged.

Following today’s announcement, the merger will come into
effect for accounting periods beginning or after 1 April 2024. In
practice for most SMEs this will see the abolition of the more
valuable SME scheme with the replacement of a slightly modified
RDEC, enabling them to claim an above the line 20% taxable credit
on its qualifying R&D expenditure.

For eligible loss-making SMEs however, it was announced that the
R&D intensity threshold, which gives an increased rate of
relief will reduce from 40% to 30%, along with the inclusion of a
one year grace period for small fluctuations in expenditure, which
are expected to be welcome changes by smaller R&D focused
businesses.

The change is also expected to be welcomed by those companies
historically claiming R&D relief under the RDEC scheme, which
will see a number of enhancements as a result of the merger,
including lifting some of the restrictions for subcontracted
expenditure and the use of the more generous SME scheme PAYE and
National insurance contributions cap.

Additionally, the policy paper published alongside the Autumn
Statement set out that:

*Rules relating to subsidised expenditure in the existing
SME scheme are no longer relevant, so these sections will be
removed from the legislation for the merged scheme before it is
published in the Autumn Finance Bill 2023.

For example, if a company receives a grant that covers part
of the cost of its R&D, or if the cost of the R&D is
otherwise met by another person, then (subject to the contracting
out rules above) this will not reduce the amount of support
available under the merged scheme.

This suggests that there will not be any exclusion of any form
of R&D relief where a project and/or expenditure is subsidised
as previously suggested.

*Wording taken from HMRC.

*[Article last reviewed and up to date as at March 22 2024 ]

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