Autumn Statement 2023: R&D Tax Relief Changes

On Wednesday 22 November, Chancellor Jeremy Hunt announced some big changes for R&D tax relief in the Autumn Statement 2023^[1].

In this article, we will outline these reforms and discuss their potential impact on businesses and the UK economy.

Autumn Statement 2023: key changes to the R&D Tax Relief

For several months, there have been discussions of an overhaul to the R&D incentive, with suggested amendments being referenced in the Autumn Statement 2022 and, later, the Spring Statement 2023.

This has now been confirmed from the Chancellor in the latest Statement and detailed in a following Technical note published by the Government. From 1 April 2024:

The RDEC and SME schemes will be merged into one consolidated framework with a single set of qualifying rules
The SME Intensive scheme, which was initially announced in the Spring Statement 2023, will be revised to provide extra support for genuine loss-making R&D intensive companies ^[2]

This announcement brings further changes to the rate of relief that many SMEs can now expect to receive, as new uplift and SME tax credit rates were already announced earlier in the year in the Spring Statement 2023.

The good news is that the revised schemes aim to make the application process considerably simpler for all claimants and their advisory partners.

Why has the government made this decision?

The Government has previously been open about their concerns surrounding the performance of the R&D tax credit schemes^[3], with many changes having been made in recent years in a bid to rectify any shortcomings (most recently with the introduction of the Mandatory Random Enquiry Program).

In previous announcements, plans for a unified scheme were already introduced. A consultation period was undertaken earlier in the year, between January and March, to gain industry feedback on the proposal.

The government has since “carefully considered both the evidence and stakeholder views in designing the merged scheme”^[4]and concluded the review with the official announcement of these changes.

The merged scheme will be crafted to use “the best of both schemes” to provide support to businesses that, through their projects, are technologically advancing their industry^[5].

How will the merged scheme work?

While we’re still waiting for official guidance that regulates the new unified scheme, the Autumn Statement and the previously published draft legislation introduce some of the new rules for claimants^[6]. The merged incentive will be modelled on the current RDEC incentive, with an aligned set of qualifying rules and a more visible above the line credit.

Notional tax rate to be lowered

Due to a change in the notional tax rate, loss making companies will receive a higher benefit compared to profit making and break-even companies.

Any company that registers a loss in the relevant accounting period will find their benefit taxed at 19%. This is lower than the current corporation tax rate of 25% that will be applied to profit making and breakeven companies.

Subcontracted R&D

Where R&D is subcontracted, the new scheme will allow the company making the decision to undertake the R&D to claim the relief. This proposal is designed to create a clear distinction over which company in an arrangement is able to claim R&D relief. This should prevent two companies from claiming for the same project and benefit only the company holding the financial risk. The government has settled on a plan to legislate for the below approach^[8]:

Companies will still be able to claim qualifying subcontractors costs under the new unified scheme.
Subcontracted companies that have to initiate R&D which is not part of the contractor’s R&D project, will be entitled to claim qualifying costs for said work.
For consistency, these changes will also apply to R&D intensive SMEs for accounting periods beginning on or after the 1^st April 2024.

Subsidised expenditure

The Technical Note brings with it good news as grant funding no longer impacts the benefit received from R&D applications.

Under the new merged scheme, when an SME receives a grant to cover part of the costs of R&D activities, or if the cost is covered by another person, the support will no longer be reduced.

The SME intensive scheme

Even more SMEs will benefit from increased recovery rates as any company that spends 30% or more of their costs on R&D will get up to 26.97% of their expenditure back.

This is an expansion of the ‘SME intensive scheme’ that was initially announced in the Spring Statement 2023 wherein companies whose R&D expenditure made up 40% or more of their total expenditure were rewarded with a higher rate of recovery.

By lowering the threshold to 30%, an additional 5,000 SMEs will qualify for the enhanced rate of relief.

To ensure the new SME Intensive scheme is fair for all eligible claimants, and operates as intended, the government will:

Introduce a one year grace period. This means that when an SME makes a valid claim through the Intensive scheme, the company will be allowed to make another claim the following year under the same incentive, even where they dip under the 30% threshold (for example due to one-off exceptional spending in the year)
Limit the use of short account periods to prevent businesses from manipulating their intensity through them.
Change the rules around grant funding. Previously, project funded by grants would benefit from a restricted R&D relief. This restriction has now been removed from the new SME scheme

Third-party payees will no longer be accepted

Starting from the 1 April 2024, claimants will no longer be able to nominate a third-party payee for their R&D tax credit payments. This will be subject to limited exceptions. Alongside this, from 22nd November 2023, no new assignments of R&D tax credits will be possible. This means funds must be remitted to the claimant and cannot be transferred to other companies or individuals, such as creditors or R&D tax agents.

This measure will ensure companies have full oversight of the claim, improving transparency and preventing fraudulent claims being submitted on behalf of companies without their consent; another step from the Government to increase compliance whilst also allowing payments to be received more quickly.

What happens next?

HMRC will publish a compliance action plan in the coming months, along with further guidance and information on how these changes will work in practice^[11].

For these periods, there will only be two R&D schemes available: the new merged scheme and the SME intensive scheme.

Our view on the announced changes

The new unified scheme promises to be a step in the right direction. By ushering in a new era for the R&D industry, the scheme sets out to provide more stability by increasing the confidence of claimants and boosting innovation in the country.

The streamlined set of rules will make the process easier to understand and should reduce the number of erroneous claims submitted to HMRC.

A more accessible SME intensive scheme, with a lower tax rate for loss-making businesses, will guarantee extra help for many businesses seeking to bring this groundbreaking solutions to market.

We await more detailed legislation but the outlines so far leave us at Apogee optimistic for the future of the R&D tax landscape.

Have all these changes got you in a spin? We’re here to guide you through it!

Please don’t hesitate to contact us with any questions or concerns you may have over the above information.

As always, we are available to chat on 01527 357789. Alternatively, you can send us an email to info@apogee.co.uk and one of our team will get back to you as soon as possible.