R&D Tax relief changes in April 2024

R&D Tax relief changes in April 2024

Research and development (R&D) tax relief has proven to be a powerful catalyst for encouraging investment in innovation for businesses across the UK, with recent figures available via HMRC revealing that the UK claimed over £7.6bn in total relief for the 2021-2022 tax year – which is a record amount.  

However, there are changes on the horizon!  In 2021, a consultation was launched to look to reform the scheme, following increasing concern that the system was being abused.

Following the consultation, the government advised in late 2022 that its goal was to merge the existing two schemes, with the intention of streamlining the incentive and helping to protect it from abuse in the future.

The new merged R&D scheme will be introduced for all accounting periods beginning on or after 1 April 2024.

The new ‘merged scheme’ combines the existing incentives for small and medium-sized enterprises (SMEs) together with the research and development expenditure credit (RDEC) scheme which was designed for larger businesses. Although some elements of the merged scheme have been welcomed by businesses, there are clear winners and losers as the government’s objective to ‘rebalance’ the different rates available will result in reduced benefit for most SMEs.

It will therefore become increasingly important for accountants to continue to play a key role in ensuring their clients are aware of the changes and helping them to plan ahead. Understanding the complexities of R&D will be vital as the long-running consultation means there are several changes, which will affect all companies accessing R&D reliefs.

R&D-intensive SMEs

What is the R&D – intensive scheme? This scheme only applies to loss making SMEs that spend a set proportion of their total business expenditure on R&D.

While the merged scheme was the main point of discussion in last year’s Autumn Statement, there will continue to be two separate incentive schemes in place, with the continuation of the enhanced rate for R&D-intensive SMEs (introduced in 2023) operating under the current SME model.

One of the key decisions made in the Autumn Statement 2023 was to reduce the qualifying threshold for the intensive scheme from 40% to 30% of a company’s total expenditure therefore this means the legislation will enable more loss making SMEs to qualify for the R&D intensive scheme, granting them access to enhanced financial relief to aid their growth and development.

There will also be a one-year grace period for companies that dip under the 30% R&D intensity threshold, enabling longer term financial planning and investment decisions by limiting cases where businesses move in and out of the R&D-intensive regime year on year.

This policy will no doubt support some smaller businesses that are committed to significant R&D investment by protecting them from the cuts to relief rates.  

Subcontracted R&D

Looking at the merged scheme and particularly the RDEC mechanism which has been chosen, there are notable changes which could disrupt existing RDEC claimants if they are under-prepared.

A technical note shared following the announcement of the merged scheme highlighted the complexity of dealing with contracted out R&D.

The reformed policy will allow most companies that outsource their R&D activities to claim tax relief for the costs associated with these contracted out R&D activities (similar to the current SME scheme). 

To achieve this, the merged scheme has introduced a detailed definition of contracted out R&D, thereby adopting a principles-based approach. While the decision to clarify this definition will resolve some of the previous uncertainty in this area, this policy change is likely to result in winners and losers.

Under the current rules, businesses that conduct R&D activities on behalf of a larger company can usually claim under RDEC (since large companies cannot incorporate those costs into their R&D claims).

Under the current scheme, a small company is likely to be considered an R&D subcontractor and able to claim relief under the RDEC scheme. However, under the new merged scheme, the subcontractor will no longer be able to claim, but the large firm can access relief on the amounts paid.

One of the key criticisms of the speed at which the merger is being implemented stems from the lack of modelling and consultation on the impact of this major change.

Subsidised expenditure restrictions removed

Another change for 2024 is the removal of all restrictions on subsidised expenditure, from both the merged RDEC scheme and the R&D intensive SME scheme.

In the previous SME framework, if a company’s R&D project received any form of subsidy, it would face restrictions in claiming tax credits for either the subsidised portion of its R&D expenditure, or in some circumstances the wider project costs.

The removal of these restrictions in the future means that companies can now claim R&D tax credits on expenditures that have been either partially or fully subsidised, which is a positive move both in terms of generosity and simplicity.

So what next ….

The legislation announced in the Autumn Statement, as outlined above, signals the end of the consultation period on R&D tax reliefs, which began in March 2021.

The overhaul of the merged scheme should simplify the relief mechanism, and a solid framework moving forward should bring much-needed long-term stability for R&D tax relief policy.

However, the overall consequences of the changes will bring a mixed impact for companies and working closely with your accountant to explain to you the intricacies of the merger and their impact has never been more important – we are here to help, so please feel free to talk to us here at Kennedys Accountants.

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