Looking Ahead to the Autumn Statement and the Brave New World of R&D Tax Incentives

The UK’s R&D tax incentive regimes are undergoing seismic changes, and this will continue into next year.  In the upcoming Autumn Statement, set for the 22 November, HMRC will (almost certainly) sign off on its draft legislation for combining the SME and RDEC regimes into a single merged regime. This will potentially taking effect from as early as April 2024.

We have recently fed in our responses to HMRC’s consultation on the merging of the regimes. Now though, it’s difficult for claimants to keep pace with the plethora of changes made to date, let alone for them to grasp what the new merged system of R&D tax relief may look like in practice. To clarify things a little, we have summarised the key points of this proposed new landscape, incorporating recent changes which are likely to continue:

• It’ll possibly take effect from 1 April 2024 (date not yet confirmed) and specifically relates to expenditure incurred from that date onwards. This means that most claimants will have an initial accounting period in which tax relief will be claimed under both systems – the “old” (i.e., current) regime and the new merged one.
• It’ll work in a similar manner to the existing RDEC scheme – showing as an ‘above-the-line’ credit, recognised as income in the claimant company’s P&L, which is then subject to corporation tax. For current SME claimants, this will mean a change in how the R&D claim is processed in the tax computation as well as potential changes to how the credit is recognised in the company accounts.
• We believe the current RDEC rates of relief will apply to the new regime, namely a 20% credit which is subject to corporation tax which is currently 25%, resulting in a net benefit of 15%. This is sadly less generous than the current SME rates which have already been scaled down since 1 April 2023.
• It appears the additional relief available for loss-making “R&D intensive” SMEs will continue under the new rules, but it is not clear how this will interact with the single merged “RDEC-like” regime and above-the-line credit structure. The R&D intensity metric was introduced from 1 April 2023 to allow SMEs who spend 40% of their company expenditure on R&D, to surrender tax losses up to 186% of the R&D expenditure for a payable credit at a rate of 14.5% instead of 10%.
• Claimants will be able to claim for payments to subcontractors under the planned changes. This would be retained from the current SME scheme, but would differ from the current RDEC rules, under which subcontractor payments do not constitute qualifying expenditure (with a few exceptions). This will obviously benefit current RDEC claimants.
• The merged regime will include the planned restrictions on relief for expenditure on overseas EPWs and subcontractors, a change which was already due to come into effect from 1 April 2024. To qualify, the work undertaken by EPWs and subcontractors must have taken place within the UK.  There are some exemptions, but these are niche.
• It’s expected that the merged regime would use the more generous version of the PAYE/NIC cap as currently used in the current SME regime, namely £20,000 plus 300% of the company’s overall PAYE and NIC contributions in the accounting period.
• Cloud, data and maths costs, which came into effect as new types of claimable costs from 1 April 2023, will continue under the merged regime.

We’ll know more once the Autumn Statement is delivered in November, but if you have any questions, please get in touch with the CP Innovation team to discuss how the forthcoming changes may impact your future claims.