The government published draft legislation earlier this year, for the merger of the RDEC and the SME R&D relief schemes. In the Autumn Statement (November 22 2023) it was announced that for periods commencing on or after 1 April 2024 there will be a single merged scheme; the proposed merged scheme (SME and RDEC schemes) as well as an SME intensive scheme.
Autumn Statement 2023 updates*
The Autumn Statement announced the merger of the small and medium sized enterprises (SMEs) and the Research and Development Expenditure Credit (“RDEC”) schemes.
Draft legislation on the merger of the schemes had previously been published earlier this year with a view to enabling the schemes to be merged from 1 April 2024, but there remained a lot of speculation as to whether the change would be made as quickly as the Government envisaged.
Following today’s announcement, the merger will come into effect for accounting periods beginning or after 1 April 2024. In practice for most SMEs this will see the abolition of the more valuable SME scheme with the replacement of a slightly modified RDEC, enabling them to claim an above the line 20% taxable credit on its qualifying R&D expenditure.
For eligible loss-making SMEs however, it was announced that the R&D intensity threshold, which gives an increased rate of relief will reduce from 40% to 30%, along with the inclusion of a one year grace period for small fluctuations in expenditure, which are expected to be welcome changes by smaller R&D focused businesses.
The change is also expected to be welcomed by those companies historically claiming R&D relief under the RDEC scheme, which will see a number of enhancements as a result of the merger, including lifting some of the restrictions for subcontracted expenditure and the use of the more generous SME scheme PAYE and National insurance contributions cap.
Additionally, the policy paper published alongside the Autumn Statement set out that:
*Rules relating to subsidised expenditure in the existing SME scheme are no longer relevant, so these sections will be removed from the legislation for the merged scheme before it is published in the Autumn Finance Bill 2023.
For example, if 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.
This suggests that there will not be any exclusion of any form of R&D relief where a project and/or expenditure is subsidised as previously suggested.
*Wording taken from HMRC.
*[Article updated November 22 2023 following the Autumn Statement]
The discussion prior to the Autumn Statement 2023:
Autumn Statement 2022
The 2022 autumn statement set out that “As part of the ongoing review of R&D tax reliefs, the government is reforming the reliefs to ensure taxpayers’ money is spent as effectively as possible. There is significant error and fraud in the SME scheme, with the generosity of the relief making it a target of fraud. By contrast, the separate RDEC credit is better value (to the taxpayer) but has a rate that is less internationally competitive. The Government is therefore rebalancing the rates of the reliefs.”
The government then published a consultation on the potential merger which ended on 13 March 2023, and has stated that the publishing of the draft legislation is as a result of consideration of the responses to this consultation. It has not yet been decided on whether to merge and HMRC intends to keep open the option of doing so from 2024. A decision on whether to merge will be made at the next fiscal event and therefore we expect further announcements at the Autumn Statement in November 2023.
What does this mean for future claims?
The proposal has always been described as a merged R&D tax relief scheme, but on examining the draft legislation it appears the proposal is essentially to abolish the more valuable SME scheme, whilst leaving a slightly modified RDEC which;
- On the plus side, this widens payments to subcontractors which are currently restricted for those claiming under the RDEC scheme and provides a more generous PAYE/NIC ‘cap’ (adopting the cap currently used for SMEs- £20,000 plus 3 times the PAYE and NIC liability for the period covered by the R&D claim), but
- On the downside, excludes any form of R&D relief where a project and/or expenditure is subsidised.
This isn’t such good news however, for the smaller start-up businesses engaging in R&D who would get less tax relief under the new scheme and for companies currently claiming under the RDEC scheme as a result of the R&D project/expenditure being subsidised in some way.
If the legislation is implemented as drafted, those companies will now need to choose between grant funding and R&D tax credits if both are available to pursue.
There may however be light at the end of the tunnel for some SMEs because whilst described as a merged scheme, it appears the proposed new merged scheme would run alongside the existing relief for loss-making ‘R&D intensive’ SME companies (companies with relevant R&D expenditure in a given claim period that amounts to at least 40% of its total relevant expenditure for the period).
In effect, there would therefore still be two schemes; an SME R&D intensive scheme and a slightly enhanced form of the existing RDEC.
With the likelihood of a single combined R&D scheme increasing, SMEs with R&D programmes and any company with subsidised projects might maximise R&D reliefs by accelerating them to take place, where possible, before 1 April 2024.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
For more insight, events and webinars, sign up to the Price Bailey mailing list…
If you would like to discuss the potential impact of these changes on your company’s R&D claims, or if you require assistance with R&D tax reliefs in general, please contact one of our specialist team.
We can help
Contact us today to find out more about how we can help you