Autumn Statement 2023: HMRC's R&D Tax Credit Scheme Changes

As we step into a new era of innovation and fiscal policy, HMRC's recent announcement about the changes to the R&D tax credit scheme marks a significant shift in the landscape for businesses engaged in research and development in the UK.

Effective for accounting periods beginning on or after 1 April 2024, these reforms, part of the Autumn Statement 2023, are set to streamline the process and amplify support for R&D activities, especially for small and medium-sized enterprises (SMEs) in the UK.

Merging of Schemes for Simplification

A central feature of these reforms is the merger of the existing schemes into a consolidated framework. This approach is a stride towards simplifying the tax relief process, making it more accessible and less cumbersome for businesses.

By consolidating the Research and Development Expenditure Credit (RDEC) and the SME Intensives Scheme, HMRC aims to create a single set of qualifying rules. This merger not only simplifies the process but also broadens the scope of qualifying R&D activities, thereby fostering a more inclusive environment for innovation across various sectors​​.

Emphasis on Contracted R&D

A notable shift in the new scheme is the focus on 'Contracted R&D'. This change allows companies that make the strategic decisions and bear the risks of R&D to claim reliefs for contracted R&D activities. This realignment ensures that the benefits are more accurately targeted towards the entities that are driving innovation. Such a move is expected to enhance collaboration and knowledge sharing, crucial for driving economic growth through innovation​​.

Changes to Subsidised Expenditure Rules

The new scheme revises the approach towards subsidised expenditures. Under the reformed scheme, grants or other forms of external funding covering part of R&D costs will no longer detract from the amount of support available under the scheme. This amendment is a significant benefit for organisations that rely on varied funding sources for their R&D projects, enabling them to maximise the benefits from the tax relief scheme​​.

Adjustments for Externally Provided Workers and Loss-Makers

The revised scheme addresses the concerns related to externally provided workers (EPWs), ensuring that the rules operate effectively and only remove overseas expenditure. Additionally, there is an adjustment in the payment mechanism for loss-making companies. As with the existing RDEC, payments of the merged scheme will be reduced via a notional tax, for loss-makers so that the amount of benefit is similar for loss-makers as for profit-makers, with companies being able to off-set the amount withheld against tax in future years.

This will be done by calculating the net amount using the rate applicable to the taxpayer (either the small profits rate (SPR) – currently 19% – or the main rate (25%)), but applying the SPR to loss makers.

This will ensure that loss-making companies receive more cash benefit upfront.

Implementation Timeline

A crucial aspect of the changes is their commencement timeline. All changes are slated to be effective for accounting periods starting on or after 1 April 2024. This timeline provides businesses ample opportunity to adapt to the new system and plan their R&D activities accordingly. The clear delineation of the start date ensures that businesses can make a seamless transition to the new regime without facing disruptions in their ongoing R&D projects​​.

The SME Intensive Scheme

The ‘SME intensive scheme’ is a special focus area in the new arrangement. Originally announced in the Spring Budget 2023, the scheme targets R&D intensive loss-making SMEs. A significant update here is the reduction of the threshold for a company to be considered R&D intensive from 40% to 30% of total expenditure.

This change broadens the eligibility criteria, allowing more SMEs to benefit from the scheme. Additionally, provisions have been introduced to provide stability and predictability for SMEs, addressing concerns about fluctuating intensity ratios due to exceptional spending​​.

HMRC's revamped R&D tax credit scheme represents a progressive step towards fostering a more robust and supportive environment for research and development in the UK.

These changes reflect the government's recognition of the pivotal role of R&D in driving economic growth and societal advancement. 

As we embrace these changes, it's imperative for businesses to understand the nuances of the new system and align their strategies to maximise the benefits. At Tax Cloud, we are committed to guiding you through these changes, ensuring your innovative work and business growth receive the financial support they need.

Get in touch

If you would like to discuss any aspect of R&D Tax Credits or the Tax Cloud portal, feel free to contact our friendly expert team on 020 7360 4437 or send us a message.

References

More information on the se changes can be found on the Gov.uk website: https://www.gov.uk/government/publications/autumn-statement-2023-research-and-development-tax-reliefs-reform/technical-note-on-changes-to-research-and-development-tax-reliefs-at-autumn-statement-2023

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud