Jeremy Hunt, the Chancellor of the Exchequer, confirmed on 22 November 2023, the much anticipated merger of the existing Research and Development Expenditure (RDEC) and SME R&D schemes from 1 April 2024. This merger simplifies into one scheme with aligned qualifying rules and a more visible above-the-line credit.
- The notional tax rate for loss-making companies under the merged scheme will be reduced from 25% to 19%, potentially increasing the amount of repayable credit. The current RDEC gross credit is 20% which is expected to remain the same under the new combined scheme.
By way of an illustration, a loss making company with £1m of qualifying expenditure would receive a gross above-the-line-credit of £200,000. Applying the reduced notional tax rate of 19% to this amount would give a £162,000 net credit (instead of the current notional tax rate of 25% which would give £150,000).
- More companies should also benefit from the additional tax relief for R&D intensive loss-making SMEs by lowering the intensity threshold from 40% to 30%
- From 1 April 2024, R&D claimants will no longer be allowed to nominate a third-party payee for R&D tax credit payments, with limited exceptions in a bid to prevent fraud and non-compliance. This is to ensure companies and HMRC have full oversight of the claim, and repayments are processed more quickly.
- The government announced the closure of the review into the R&D schemes by the merging of the SME R&D scheme into the RDEC scheme.
- There is still quite a lot of detail on the design yet to be received particularly on how subcontracting will be treated with the government suggesting a clearer distinction will be made between ‘contracts for services’ and ‘contracted out R&D’
- Under the RDEC scheme, companies can only claim on subcontracted expenditure to qualifying bodies, individuals, or partnerships of individuals.
- Under the SME scheme, companies can claim more widely for qualifying payments to most subcontractors.
- Further changes are expected from 1 April 2024 to restrict expenditure on payments to subcontractors on UK expenditure, or qualifying overseas expenditure.
- The government also recognised the need for further action to curb non-compliance in claims for R&D tax reliefs, HMRC will release a compliance action plan.
Additional tax relief for R&D intensive SMEs – watch this space!
The technical note on changes to R&D tax reliefs published as part of the autumn statement suggests some form of additional tax relief for R&D intensive SMEs will continue beyond 1 April 2024, although the interaction with the merged scheme remains unclear clear.
By way of background, the current SME R&D scheme gives an additional deduction of 86% on qualifying expenditure, and the SME payable credit rate of 10% (increased to 14.5% for R&D intensive loss-making SMEs).
By way of an illustration, a loss-making SME with £1m of qualifying expenditure would receive an additional deduction of £860,000. It could surrender of losses of up to £1,860,000 i.e. the enhanced qualifying expenditure at 10% for a repayable credit of £186,000 (14.5% for R&D intensive loss-making SMEs £269,700)
One possible scenario could be that the additional deduction of 86% on qualifying expenditure, and the SME payable credit rate of 14.5% will be retained solely for R&D intensive SMEs.
If you would like more information or updates on the points raised above, please speak to your PEM adviser, or contact us.
This article was correct at time of publication.