In its Autumn Statement, the Government confirmed the merging of the Research and Development Expenditure Credit (RDEC) scheme for large companies, and the Research and Development (R&D) scheme for small companies. The new scheme will take effect for accounting periods beginning on or after April 1st 2024.
What do we know about the merged scheme?
The mechanics of the new merged scheme will be based on the RDEC scheme – i.e., an above-the-line credit, as opposed to the enhanced deduction offered by the SME scheme. The rate offered under the merged scheme will be implemented at the current RDEC rate of 20%.
To encourage R&D work to be performed in the UK, rules were previously announced that relief will only be available on the costs where the subcontracted work is performed in the UK or where externally provided workers are paid through a UK payroll. These restrictions on relief for overseas expenditure will form part of the merged scheme and will continue as planned to be applicable for accounting periods beginning on or after April 1st 2024.
Companies will welcome clarification on the eligibility of contracted-out R&D, with the decision maker being able to make the R&D claim. We are yet to analyse this change in any detail and questions remain about who can now claim and who will lose out.
The more generous PAYE/NI cap applied to the current SME scheme will apply under the merged scheme (currently £20,000 plus 300% of the company’s total PAYE/NI liability).
How have SMEs been impacted by changes to R&D rates?
Historically, the SME scheme has been generous by international standards. The Chancellor, Jeremy Hunt, has previously stated that he is concerned it is not working as it should be to encourage R&D – although perhaps he was just concerned that it was too expensive.
SMEs have seen the R&D tax relief available reduce in value, and this announcement is no different.
Let’s recap. For R&D expenditure up until April 1st 2023, a loss-making company could claim a tax credit worth up to 33.35p in every pound spent on qualifying R&D. But since April 1st 2023, this tax credit has been reduced to 18.6p in every pound spent on qualifying R&D – a reduction of approximately 44%.
Under the merged scheme, the 20% above-the-line credit is taxable, therefore the effective tax saving is net of the Corporate Tax rate, being 25% for main rate taxpayers, and 19% for those within the small profits rate.
The RDEC is currently worth up to 15p in every pound spent on qualifying R&D and worth up 16.2p for a loss-making company.
R&D intensive companies
R&D incentives for SME companies have halved over the past couple of years, so is it still worth making a claim? The Government is adamant it wants to continue to incentivise loss-making R&D intensive companies encouraging them to continue to claim under the SME scheme.
The Autumn Statement announced the SME R&D intensity threshold announced previously in the Spring Budget will be reduced from 40% to 30% for accounting periods beginning on or after April 1st 2024. The R&D intensity threshold is calculated as qualifying R&D expenditure over the company’s total expenditure.
This will mean that a loss-making R&D intensive SME company will not fall into the merged scheme but will continue to claim the enhanced deduction at 86%, and be able to claim the repayable tax credit from HMRC at 14.5%, an effective tax saving of 26.97p in every pound spent on qualifying R&D.
Profit-making SMEs and non-R&D intensive loss-makers will, for accounting periods beginning on or after April 1st 2024, form part of the new merged R&D scheme.
We hope that these announcements are the final changes to the R&D landscape, so companies can assess what R&D looks like for them in the future and we look forward to analysing the detailed legislation when this is available.
Companies will want to consider the impact of these changes now. If you would like to know more about R&D claims for your business, get in touch with Sam Jones:
Email: enquiries@krestonreeves.com
Call: 0330 124 1399
Visit: www.krestonreeves.com
