Autumn Statement 2023 – R&D tax relief reforms

Substantial reform of R&D tax incentives had already been trailed before the Chancellor’s Autumn Statement, and draft legislation for consideration had already been published in a consultation. Currently, there are two schemes of R&D tax incentives; one mainly for large companies and the other mainly for SME companies. The proposal was to merge the two current schemes into a single scheme for all companies.  Today’s statement confirmed that the Government will be pressing ahead with passing legislation to achieve this, albeit retaining separate favourable treatment for ‘R&D intensive’ companies (with some small modifications in this regard).

The new scheme will effectively operate on similar lines to the current R&D Expenditure Credits (RDEC) scheme for large companies. Rather than extra tax relief for qualifying R&D expenditure, this RDEC scheme provides a straight credit (proposed to be 20% of qualifying expenditure), although this credit is itself subject to corporation tax. Clearly this will be a significant departure and will be unfamiliar territory for most SME companies who may take time to get to grips with the new approach.

Given the extensive nature of the proposed reforms, many commentators including professional accountancy and tax bodies urged the Government to delay the introduction of the new scheme from its proposed 1 April 2024 commencement, to allow more time for it to be considered and assimilated. Today’s announcement only gives a small nod in the direction of a delay; instead of the new scheme applying to expenditure incurred on or after 1 April 2024 as previously proposed, it will now apply for accounting periods beginning on or after 1 April 2024.

This change will lead to the unusual position where R&D expenditure after 1 April 2024 will attract different R&D tax incentives depending on the claimant company’s year end.  For example, companies with a 31 March year end will find that their R&D expenditure will fall straight into the new scheme with effect from 1 April 2024; whereas, companies with a 31 December year end will continue to be able to claim under the current (in many cases more favourable) schemes for expenditure up to 31 December 2024.

Although presented as a significant simplification of R&D tax incentives, there are likely to be some ongoing complexities, in particular regarding subcontracting of activities, on which there has been a lot of debate.  It appears that some of the contentious discussions surrounding ‘customer led’ R&D might be set to continue, with the new legislation seeking to identify the appropriate claimant depending on whether the subcontracting is of R&D activities or other services.

The more favourable provisions for ‘R&D intensive’ SMEs will also remain, but with an amendments so that a company will be considered R&D intensive if its R&D expenditure is at least 30% of total expenditure (rather than 40% currently). There will also be a ‘year of grace’ provision so that an R&D intensive SME will continue to be able to claim under these provisions for the year after it ceases to be R&D intensive.

Given that the new R&D tax credit scheme involves an entirely different mechanism for most SME companies and some ongoing complexities regarding commercial arrangements, its introduction at a time when there will also be differential main corporation tax rates depending on profit levels will, we fear, only add to the complexity of the tax position for most SME companies undertaking R&D activities.

For further Autumn Statement commentary, click here.

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