Autumn Statement 2023
The Autumn Statement 2023 announced some changes to the R&D Tax Credit programme for 2024. RDP have put together a summary of what companies can expect for their R&D Tax Credit submissions from April 2024.
Merging RDEC and SME
HMRC and the Government are moving ahead to merge the SME scheme into the RDEC scheme. This will apply for accounting periods beginning on or after 1 April 2024. Under the merged scheme the R&D tax credit rate will be at the current RDEC rate of 20%. However, as described below there will be additional tax relief for R&D intensive SMEs.
The merging of the two schemes will allow companies, both large and small, to follow one set of rules.
Additional Tax Relief for R&D Intensive SME’s
Earlier this year, the Government announced in the Spring Budget 2023, that they would implement enhanced support for R&D Intensive SMEs. This was good news for loss-making SME companies, who will be eligible for a higher payable tax credit rate of 14.5% on the enhanced expenditure uplift rate of 86%. Providing the R&D intensive SME an effective R&D tax credit rate of 26.7% of eligible R&D expenditure.
As of 1st April 2024, the intensity threshold that will be required to qualify for the enhanced support will be reduced from 40% to 30%. This means that an R&D intensive company is one where at least 30% of all expenditure in spent on qualifying R&D. An additional 5,000 SMEs will now qualify.
There will also be a one year “grace period” for companies that cease to qualify for the R&D intensive scheme. This means if a company meets the 30% threshold in year 1 but misses the 30% threshold in year 2. The company will still be able to claim under the R&D intensive scheme in year 2. In other words, only if the company misses the 30% threshold limit for two successive years will it fall out and have to claim under the common merged scheme.
There has been considerable confusion regarding R&D contract work. Essentially, the question is, “who is permitted to make the R&D tax credit claim, when one company contracts another company to do R&D work?”.
As HMRC explains “Where a company with a valid R&D project contracts a third party to undertake some of the (qualifying) work connected with their R&D project. The company may claim the relevant (qualifying) costs of that contract. The company contracted to do that work may not claim for R&D activities which delivers the project outcome for another company’s project.
If a company is contracted to do work for another company, but the work does not form part of R&D for the customer and was instead initiated by the contractor. Then the contractor may be able to claim relief for their work. But only if they meet the requirements of having valid R&D which is otherwise eligible for tax relief. This is considered an essential element.”
This clarification is very welcome as the current legislation leaves a broad interpretation. Where an SME may not be able to make an R&D claim when any contract payments are received.
Another welcome proposal is that the subsidised expenditure rules will be eliminated and removed from the legislation. This applies for the merged scheme before it is published in the Autumn Finance Bill 2023.
This means that where a company receives a Grant that covers part of the cost of its R&D, or if the cost of the R&D is otherwise met by another person, then (subject to the contracting out rules above) this will not reduce the amount of support available under the merged scheme.
Taxation of R&D Tax Relief- Step 2 Reduction
Any payments received under the merged scheme will be reduced via a notional tax (in other words any tax credit or relief benefits are taxable). For loss-making companies, they will calculate the tax on R&D tax relief at a rate of 19% and not the main rate of 25%.
This change will ensure that loss-making companies receive more cash benefit upfront.
Do you have concerns about the Autumn Statement 2023, are you worried about your 2024 R&D tax credit claim or just need advice, contact our team at RDP today to discuss further on 0208 214 1341 or email Jenni at [email protected].