Autumn Statement 2023: What does it mean for R&D tax relief?
Set against a backdrop of falling (but still high) inflation, a heavy tax burden and a general election just over the horizon, Jeremy Hunt presented his second Autumn Statement today on 22nd November 2023.
The Chancellor reported more fiscal room for manoeuvre than a year ago and delivered headline grabbing tax cuts on full expensing for businesses and employee National Insurance. However, for innovative businesses, he also had major (if not entirely unexpected) news on R&D tax relief.
Following the consultation into R&D tax relief launched in 2021, the Autumn Statement confirmed a merging of the existing R&D Expenditure Credit (RDEC) and SME Scheme in April 2024. An accompanying Treasury publication shared some of the main detail ahead of the Autumn 2023 Finance Bill.
It was also announced in the statement that more companies will become eligible for the intensive loss-making SME R&D scheme.
How is the government’s R&D budget impacted?
The government anticipates that the merging of the R&D tax relief schemes will start to have an impact in the 2025/26 tax year, spending an extra £50 million, rising to approximately £250 million in each of the next three tax years.
What will the new merged R&D tax relief scheme look like?
The merged scheme will be introduced for all accounting periods commencing on 1st April 2024 and later. This is a simplification, as previously it was intended to be for expenditure made after 1st April, thus requiring most companies to do a split claim under old and new schemes in the transitionary year.
The rate paid under the merged scheme will be the same as the current RDEC rate: a 20% above the line credit. For loss-making companies, a notional tax rate of 19% (the small profits rate) will be applied, rather than the main 25% rate currently used in RDEC.
Under the merged scheme, a sub-contracting company directly performing R&D for another company will not be able to claim R&D tax relief. The claim must be made by the decision-making company commissioning the R&D.
Should a sub-contractor carry out more incidental R&D in the course of delivering a non-R&D project to a contractor, then they may still be eligible to claim under the merged scheme.
Where a company is able to claim on subsidised expenditure (like a grant) on its R&D, this will not lower the support provided by the new scheme.
Updates to the scheme for R&D intensive loss-making SMEs
In the Spring Budget, the Chancellor announced a new scheme for loss-making SMEs conducting intensive R&D from 1 April 2023. This will sit alongside the new merged scheme post April 2024.
To qualify it was previously stated that an SME’s R&D expenditure should be 40% of its total expenditure. But in the Autumn statement, this was reduced to 30%. This measure is estimated to enable an additional 5,000 companies to access the scheme which pays an enhanced rate of 14.5%.
How will the Autumn Statement changes impact companies?
The merged scheme is presented as taking the best from both the RDEC and SME schemes. In practical terms, the RDEC tax credit is more generous than it appears. The Spring Budget earlier this year, raised the above-the-line credit from 13% to 20%.
- Loss making companies will benefit from a more generous nominal tax rate of 19% rather than 25%.
- Contracting companies will have more scope to claim for outsourced R&D work they commission.
- The overall R&D tax relief landscape should be simplified for everyone, albeit there will still be nuance and the need for expert advice to ensure accuracy.
Autumn Statement 2023 R&D tax relief FAQs
When does the new merged R&D tax credit scheme come into effect?
The merged R&D tax credit scheme comes into effect for accounting periods which commence after 1st April 2024. This means that you won’t have to apply the changes part way through an accounting period.
What is the tax credit rate for the new merged R&D tax credit scheme?
The tax credit rate for the new merged R&D tax credit scheme is an above the line 20% rate. This is in line with the current RDEC scheme.
What happens if we perform sub-contracted R&D under the new merged R&D tax credit scheme?
Sub-contracted R&D will now normally be claimed for by the contractor, not the subcontractor. The exception is if qualifying R&D is performed by a subcontractor that is not directly part of what was commissioned by the contractor.
How much expenditure must we make to be eligible for the intensive R&D scheme?
In the 2023 Autumn Statement, the Chancellor announced that the required expenditure from an SME to qualify for the intensive R&D scheme would be reduced from 40% of total expenditure to 30%.
Expert help with your R&D claim
While the merged scheme is designed to be a simplification, R&D tax relief will remain a changing landscape. Our expert help will ensure you follow the latest rules, include the correct expenditure and activity in your claim and complete the right documentation. This is particularly important as HMRC explores new ways to clamp down on non-compliance.
Can we help your business?
Book a free consultation with our expert R&D funding advisors today. We specialise in helping innovative businesses like yours unlock millions in government funding, specifically allocated to fuel your innovation. Let us help your business access the support it deserves.
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