Research & Development (“R&D”) tax relief

The measure

The government has confirmed that it will proceed with merging the two UK R&D regimes, namely the Small or Medium Enterprises (“SME”) and the Research and Development Expenditure Credit (“RDEC”) schemes, into one consolidated scheme. 

Once the changes take effect, all claimants under the merged scheme will receive relief via a taxable credit. It was also announced that under the new scheme design, loss-making companies will be subject to a lower notional tax thereby increasing the net benefit of the repayable credit. Further announcements confirm the intention for the decision maker to claim the R&D costs for contracted out R&D and that subsidised expenditure will qualify for relief under the new merged scheme. In addition, it was signalled that the previously published draft legislation will be amended to clarify that the amount that can be claimed in respect of externally provided workers will not be doubly restricted. 

There is also a proposed change to the “R&D intensity ratio” for loss-making SMEs to meet the threshold to be considered a R&D intensive business (“RDIB”), together with the proposed introduction of a grace period to provide more certainty for companies which fall under the threshold by maintaining their status for two consecutive periods. 

It has also been clarified that going forward payment of an R&D credit must be made to the claimant company rather than a nominee company and in addition no new assignments of R&D tax credits will be possible. 

Finally, the government has confirmed it has now concluded its review of the R&D tax reliefs; however HMRC plans to publish a compliance action plan to continue to monitor potential non-compliance. 

Who will be affected?

The changes will affect all existing R&D claimants with the exception of RDEC claimants which offset their RDEC in full against tax liabilities and which only have internally funded projects and no subcontract or overseas R&D expenditure in their claims. 

Under the merged scheme, a loss-making company will suffer a notional tax rate of 19% rather than 25% on the tax credit, delivering a net benefit of 16.2% of R&D spend as a cash repayment versus 15% for taxpayers. 

The SME “high-intensity” ratio to claim the repayable tax credit, calculated by comparing qualifying R&D expenditure as a percentage of total expenditure, will become at least 30% (currently 40%). Companies meeting the criteria will be able to claim the repayable tax credit at a higher rate of 14.5% equivalent to up to 27p in the pound compared to 16.2p in the pound for other SME claimants. 

When will the measure come into effect?

The merged scheme will be legislated for in the Autumn Finance Bill 2023 and will apply for accounting periods beginning on or after 1 April 2024. 

For RDIBs, a claim for qualifying expenditure incurred from 1 April 2023 will be able to be made once the Autumn Finance Bill 2023 has received Royal Assent. However, the reduction in the intensity threshold and the grace period will come into effect for accounting periods beginning on or after 1 April 2024. 

R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments made on or after 1 April 2024, subject to limited exceptions. In addition, no new assignments of R&D tax credits will be possible from 22 November 2023.