Confirmed date for the merged R&D tax relief scheme
The headline news is that plans for a single R&D tax relief scheme, which merges the SME and RDEC schemes, is confirmed to go ahead for accounting periods starting on or after 1 April 2024. This confounds earlier speculation that there would be a delay. This does at least give us some certainty on the timelines, although it is indicative of the continued fast pace of change around R&D tax relief.
Technical detail around the merged R&D tax relief scheme
At the same time as the Autumn Statement, HM Treasury released a technical note further clarifying detail around the merged scheme, particularly around subcontractor rules, subsidies, and the loss-making R&D intensive SME scheme. In short, HMT has clarified that (in sub contractual arrangements) the customer (decision maker) will be the one eligible to claim R&D relief, not the subcontractor. The reasoning behind this is to allow the entity taking the financial risk to be the entity eligible for R&D relief. A position we have supported since the initial consultation.
Though, there is limited flexibility within the system. HMT has outlined that subcontractors will be able claim for projects that do not relate to the customer’s R&D given the subcontractor initiated the project. This is a welcome move away from the initial position set out in July’s draft legislation where the subcontractor categorically could not claim R&D tax relief.
HM Treasury also abolished the subsidy limitations. It was initially proposed that if an R&D project was subsidised, in whole or in part (by grant or other means), then the company could not claim R&D relief. This has now been scrapped. We are pleased to see this change and it was another recommendation we made during HMRC’s consultation process.
Reduction of the notional tax rate
Forming part of the announcement is a reduction in the notional tax rate applied for loss making companies in the new merged scheme from 25% to 19%. This affects the above-the-line credit rate calculation and is slightly more generous than originally proposed.
A more generous threshold – R&D intensive SMEs
In recognition that the merged scheme could negatively impact the most innovative SMEs, there was an enhanced rate proposed for loss making R&D intensive businesses. This was originally defined as a business whose qualifying expenditure represented 40% or more of their total expenditure. This has now been reduced to 30%. This is again more generous and should mean that approximately an additional 5000 businesses benefit from the enhanced rate.
The closing of a chapter
The Treasury is now ending its review into the R&D tax reliefs, concluding a two-year review into the competitiveness of the UK’s R&D incentives. Treasury has concluded that the R&D reliefs are fit for purpose, however, hint to further work on tackling non-compliance with HMRC to release a compliance action plan in due course.
Redesign of creative industry tax relief
This is one to watch. The creative industries tax reliefs are due for a redesign and for an enhanced benefit. There is a call for evidence and GovGrant will be looking closely at the potential impact for our clients.
Encouraging investment in UK businesses
As widely predicted, it was confirmed that full expensing on capital spend will be made permanent. This provides longer term certainty and allows businesses to continue to offset their investments on IT, machinery, and equipment against Corporation Tax.
In addition, the Chancellor announced various measures of support to key sectors including £4.5bn to attract investment into strategic manufacturing, Freeport tax incentives extended to 10 years, £500m investment to fund “innovation centres” to help make the UK an “AI powerhouse”.