SUMMARY

Overall, the government is looking to encourage investment into R&D.

The introduction of a single scheme is aimed at simplifying the claims process (although there will still be a separate scheme for R&D-intensive companies).

Some companies will benefit, whilst others will not, particularly where a large proportion of the R&D work is being undertaken overseas, as the new rules restrict R&D claimable expenditure to activities undertaken in the UK (although some exceptions apply).

Changes in rules for contracted-out expenditure mean that whilst large companies will benefit from this change, the ‘do-er’ of the R&D will miss out on claiming as the payer will be claiming these costs.  Here too there are some exceptions as explained below.

Some loss-making SMEs will receive more cash benefits upfront through the cash-back calculation, which will provide a net tax benefit of 16.2% on the credit versus 15%.

To prevent non-compliance, HMRC will be publishing a compliance action in due course.

KEY CHANGES

A NEW MERGED SCHEME somewhat akin to the current R&D Expenditure Credit (RDEC) scheme. Companies will be able to claim a credit of 20% on qualifying R&D Expenditure. The credit will be recorded ‘Above the Line’ on the company’s P&L statement, positively impacting its EBITDA.

Under the new scheme, SMEs and their teams will now be able to see the impact of their work directly on the P&L statement.

This treatment will be different from the current enhanced deduction of 86%  they claim on qualifying R&D expenditure.

The new scheme will come into effect for accounting periods beginning on or after 1 April 2024.

CONTRACTED OUT EXPENDITURE

All companies will be allowed to claim for contracted-out R&D. New rules will prescribe how this will work in the new merged scheme.

Briefly:

  • where a person is contracted to undertake R&D activities, no claim for relief for the work can be made, because the customer will be claiming relief for this as part of their R&D project.
  • On the other hand, where the person is contracted to provide a service during which, if they undertake R&D to complete, this may be claimable by the contractor.
  • The above expenditures will however be claimable if the contractor is undertaking work for a non-UK entity.

These rules once released, will hopefully clarify:

  • how it can be proven who will be entitled to the claim, and;
  • how this can be evidenced.  Will the company undertaking R&D on behalf of the paying company be willing to share these details to help the claimant company to support their R&D claims?

CAP ON CASH CREDIT

The merged scheme will adopt the more generous PAYE and National Insurance contributions cap which is currently applied in the SME scheme, meaning that fewer businesses will need to consider whether they are at risk of hitting it.

RULES ON SUBSIDISED EXPENDITURE ABOLISHED

Currently, subsidised expenditure cannot be claimed under the current SME scheme, although the SME can separately claim this under the RDEC scheme.

Under the new scheme, the SME rules restricting relief where part of the project expenditure has been subsidised, have been removed.  This removes the complications of checking whether the SME has received grant funding or other forms of subsidies in relation to any of its R&D projects, and treating these differently for the purposes of calculating qualifying expenditure.

For large companies, this removes the complexity of the rules around payments made to qualifying bodies.

EXTERNALLY PROVIDED WORKERS

A new section will be added to define qualifying earnings in relation to ‘Externally Provided Workers’, clarifying how the rules will work.  Overseas expenditure will be excluded as explained below.

This is likely to impact many SMEs as well as large companies that have large overseas teams contributing to R&D activities.

RESTRICTION OF RELIEF TO UK R&D AND SOME NECESSARY OVERSEAS R&D

A new section will define UK expenditure as that attributable to relevant research and development undertaken in the UK; and qualifying overseas expenditure as that attributable to activity undertaken overseas which is necessary due to geographical, environmental or social conditions not present or replicable in the UK. Cost of the work, and availability of workers, are specifically excluded as factors.

SEPARATE SCHEME FOR LOSS-MAKING R&D-INTENSIVE COMPANIES

Loss-making companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.

A company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure.

For accounting periods beginning on or after 1 April 2024, the intensity threshold will be reduced from 40% to 30%, meaning more loss-making SMEs will be able to claim the higher rate of credit.

Additionally, there will be a one-year grace period that allows a company that fails to meet the intensity threshold, for example, due to a one-off shock (such as exceptional items of expenditure) or small fluctuations in expenditure (for companies close to the threshold), to continue claiming the enhanced support in that year if it met the intensity threshold and successfully claimed enhanced support in the previous year.

The one-year grace period will apply to accounting periods beginning on or after 1 April 2024.  This is a very encouraging move by the chancellor to support companies undertaking significant levels of R&D.

RESTRICTIONS ON NOMINATIONS FOR R&D RELIEF

This measure, subject to limited exceptions, removes the use of nominations for R&D tax credit payments. This will stop payments being made to third parties, with payments now going directly to claimants.

OUR THOUGHTS

Overall, the Autumn statement seeks to encourage UK investment into R&D and the changes to a merged scheme are aimed at simplifying the claims process.

The move to allow the payer of the subcontracted expenditure from the ‘do-er’ of the work may present some challenges as

  • there may still be ambiguity in who will be entitled to claim for this work, eventually reference to contractual agreements will be key;
  • the entity to whom the work has been contracted may not want to share details of the R&D work they have undertaken.

The restriction of the credit to UK activities will also significantly impact many SMEs as well as Large company claimants.

On the other hand, the full expensing first-year allowances on capital expenditure will enable companies to further accelerate tax benefits on their investments.

IF YOU WOULD LIKE TO UNDERSTAND HOW THESE CHANGES IMPACT YOUR CLAIMS, PLEASE DO GET IN TOUCH WITH US.