R&D tax relief schemes to merge in 2024 – What it means for future claims

Chancellor Jeremy Hunt has announced a number of reforms to policies concerning businesses and innovation, in a bid to enhance growth in the economy.

A significant measure concerns various tax relief schemes for businesses in the Research and Development (R&D) sector.

Many operators in this sector are eligible for Corporation Tax relief on qualifying expenditure to ease the burden of investing in R&D costs and encourage growth.

Recent changes have left many businesses, particularly small and medium-sized enterprises (SMEs), in a state of uncertainty around what future claims might look like. The number of recent amendments to the rules has caused considerable uncertainty and a sense of instability for companies that claim R&D tax relief.

There is however no suggestion that the core definition of what constitutes R&D for tax purposes will be amended.  Claimants will still need to demonstrate that their project addresses an underlying technical uncertainty in the field of science or technology.

What has changed?

Under previous legislation, businesses conducting R&D could claim tax relief under two separate schemes – the R&D Expenditure Credit (RDEC) and the SME relief.

Each scheme had separate criteria for businesses fitting the standard definition of R&D.

Under new regulations, the SME and RDEC schemes will now be merged in a bid to simplify the process.

Under the new scheme, all qualifying businesses, regardless of staff levels or turnover, will be able to claim against R&D spending at a rate of 20 per cent on all qualifying expenditure from 1 April 2024, giving a post-tax rate of between 15 per cent and 16.2 per cent.

In addition, the notional tax rate for loss-making companies will be reduced from the main rate of 25 per cent to the ‘small profits’ rate of 19 per cent in April 2024.

The new scheme also encourages firms which subcontract R&D activities. Where a company with a valid R&D project contracts a third party to undertake qualifying R&D activities, the company may claim the qualifying costs of that contract. The sub-contractor may not make a claim for R&D relief.

By adopting similar rules to the existing SME scheme, the merged relief will allow tax relief claims on many more outsourced R&D.

The rules relating to subsidized expenditure will also be improved for SME businesses under the new merged scheme.  Where a company receives a grant covering part of the costs of their R&D (for example), the amount of relief available will not be reduced.

Who’ll be affected?

All businesses that claim R&D tax relief under either of the previous schemes may be affected.

To qualify for this credit, businesses must meet the following general criteria:

  • Look for an advance in their field.
  • Try or succeed at overcoming a scientific or technical uncertainty
  • Address an issue that cannot be easily resolved by a professional in the field
  • Is new to the market place as a whole and not just new to the company

Aside from the merge, SMEs may now claim additional relief on R&D expenditure if they qualify as ‘R&D intensive’, meaning at least 30 per cent of their expenditure covers R&D, for accounting periods after 1 April 2024.

How will future claims be affected?

The aim of the measure is to simplify the process of claiming R&D tax relief with a single set of qualifying rules.

Its impact on future claims will depend on whether the individual firm is a principal or subcontractor in an R&D agreement.

For firms themselves, this simplified way of claiming capital allowances on R&D expenditure is likely to provide a major incentive to invest in R&D and raise the profile of its R&D programme.

The measure also removes the need for growing companies to transition between the SME and RDEC schemes, meaning that firms can scale their operations and turnover without impacting their eligibility to claim for R&D under the scheme.

However, it is likely that subcontractors, which are currently able to claim under the existing schemes, will see a significant incentive removed as they can no longer claim relief on R&D expenditure under the merger.

This may mean that the R&D sector faces a period of uncertainty and slow growth while operators adjust to new regulations. Outsourcing agreements may also need to be renegotiated to reflect the new tax relief arrangements.

With no transition period between the two schemes, R&D operators will almost certainly need to seek professional support to quickly identify how these new measures will impact them.

For advice on R&D and these new measures, please contact our expert team today.

Posted in News, Newswire.