In yesterday’s Autumn Statement, Chancellor Jeremy Hunt confirmed the government will merge SME R&D Tax Relief for profitable and non-R&D intensive unprofitable businesses and the Research and Development Expenditure Credit (RDEC) into a single scheme.
This move represents one of the most significant changes to R&D Tax Relief in its 23-year history and follows a series of major reforms implemented over the last 12 months.
Here are the key things you need to know about this watershed news and what it means for your future claims.
R&D Tax Relief merger
The government is pressing ahead with plans to combine RDEC and SME R&D Tax Relief for profitable and unprofitable, non-R&D-intensive businesses into a single regime servicing most claimants. The merger will broadly follow proposals originally published in July 2023.
Impacting accounting periods starting on or after 1 April 2024, the new scheme will closely mirror RDEC, offering an above-the-line credit worth 20% of qualifying expenditure. After tax, profitable companies will receive either 16.2p or 15p per £1 of investment, depending on their tax rate.
Unprofitable companies will be subject to a notional tax of 19%, meaning they will receive 16.2p per £1 of investment. This makes the merged scheme more generous than RDEC, where the notional tax rate is 25%, in line with the main rate of corporation tax.
R&D-intensive threshold lowered for SMEs
The government is reducing the amount of money SMEs need to spend on R&D to qualify as R&D-intensive from 40% to 30% of total expenditure. As a result, a further 5,000 businesses will be able to access the more generous scheme for highly innovative loss-makers.
Introduced following criticism of the government’s cuts to SME R&D Tax Relief announced during the 2022 Autumn Statement, the R&D-intensive scheme offers a relief rate of 27%, providing more funding for small businesses committing considerable resources to innovation.
The government is also introducing a grace period, meaning companies that fall below the 30% threshold will be able to access the R&D-intensive scheme for an additional year.
How this affects your relief
Here’s what the merged scheme means for your R&D Tax Relief.
| Company Type | Relief Pre 1 April 2023 | Current Rates | Relief From 1 April 2024 | Difference |
|---|---|---|---|---|
|
SME - Profit-making |
24.7% |
16.34% |
15% |
-8% |
|
SME - Break even
(non-R&D intensive) |
18.85% |
8.6% |
16.2% |
+88% |
|
SME - Loss-making (non-R&D intensive) |
33.35% |
18.6% |
16.2% |
-13% |
|
SME - Break even (R&D intensive) |
18.85% |
12.47% |
12.47% |
0% |
|
SME - Loss-making (R&D intensive) |
33.35% |
26.97% |
26.97% |
0% |
|
Large - Profit-making |
10.53% |
15%-16.2% |
15%-16.2% |
0% |
|
Large - Loss-making |
10.53% |
15% |
16.2% |
+8% |
As we can see, loss-making, non-R&D-intensive SMEs will be worse affected by this merger. Between April 2023 and 2024, small, unprofitable businesses stand to lose 51% of their R&D Tax funding, with relief rates plummeting from 33% to 16.2%.
This will be a difficult pill to swallow for loss-making SMEs, which are least able to self-finance development work and are most vulnerable to economic hardship.
Conversely, non R&D-intensive SMEs breaking even will see their R&D Tax Relief almost double. This corrects a strange aspect of the SME scheme, where companies were effectively punished for breaking even by being given less funding. We called this peculiar situation ‘the valley of death’.
PAYE Cap carried over from SME R&D Tax Relief
The new scheme will use the PAYE Cap limits that apply to the current SME scheme.
The PAYE Cap limits the size of payable credit loss-making companies can receive based on the size of their combined PAYE and NIC liability.
The SME cap lets loss-making companies claim a payable credit worth up to 300% of their combined PAYE and NIC liability, plus £20,000.
This is considerably more generous than the RDEC cap, which limits a company’s payable credit to just 100% of their PAYE/NIC liabilities.
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Subcontracted R&D and the combined scheme
Both large companies and SMEs will be able to claim R&D Tax Relief on subcontractor costs under the combined scheme.
Whether the commissioning business or subcontractor is eligible to claim depends on who decided the R&D should be performed.
If the commissioning business subcontracts another company to undertake a project including R&D – and the contract between the two parties stipulates as much – the commissioner will be able to claim relief on the work.
If the subcontractor was not commissioned to perform R&D but needed to do so to complete the project it was hired to undertake, it may qualify for R&D Tax Relief instead.
The subcontractor situation is still a little vague, but the government says it will publish legislation to clear things up in the near future.
Why is the government merging the schemes?
The merger is the last of a series of major reforms designed to improve compliance, deliver value for money for taxpayers, and ensure R&D Tax Relief effectively incentivises innovation. These reforms were based on a comprehensive review of R&D Tax Relief conducted by HMRC in early 2021.
The government says the merger was specifically designed to “simplify and improve R&D Tax reliefs”. Will it achieve this? Time will tell. But given we will still have multiple schemes, a lack of clarity around issues like subcontractors, and different rates of relief on offer, it’s far from certain.
According to the Autumn Statement, the merger will save the government £280 million. In last year’s Autumn statement, the Chancellor explained he was cutting relief for SMEs because of “worrying reports” of abuse. It’s possible the merger is also another attempt to cut the cost of non-compliance.
Compliance remains a priority
There might not be any more major changes on the horizon, but the government has vowed to continue its campaign against non-compliance, which cost the exchequer 1.13 billion in the 2020 financial year. “Further action may be needed to reduce the unacceptably high levels of non-compliance in the R&D reliefs,” the government said.
HMRC is developing an action plan for improving compliance, which will be released “in due course”. GrantTree will be analysing the plan once it’s published and explaining what it means for claimants. Stay up to date by subscribing to our newsletter.
The Chancellor also announced an extra £5 billion in HMRC funding to improve compliance and reduce tax avoidance. As a result, we are likely to see another rise in the number of enquiries, putting further pressure on businesses to ensure their submissions only contain eligible projects and costs.
Questions? Speak to GrantTree
If you have questions about how this latest round of changes affects your next claim, GrantTree’s R&D Tax experts are here to help.
We can run you through what the merger means for your future submissions, how much more or less relief you can expect to receive, and what you can do to protect yourself from the government’s ongoing compliance drive.
