New R&D scheme helps ‘risk takers’ but still poses challenges due to contrasting nature of rules
Scott London-Hill · November 27th 2023 · read
Previously announced draft legislation caused considerable concern within the R&D industry that proposed changes may prohibit genuine R&D companies from receiving a fair benefit.
As expected, the Government has announced a merging of the old SME and RDEC schemes into a new RDEC-style scheme to be implemented for accounting periods starting on or after 1 April 2024.
With this comes challenges on how certain elements should now be treated due to the contrasting nature of the rules. Fortunately, or perhaps, due to industry pressure and the risk of lawsuits – the Government has taken a more practical approach, announcing some welcome changes which are outlined below:
One concern was the treatment of subcontracted and subsidised R&D. Draft legislation suggested that no company would be able to claim if they were contracted to undertake work – even if the R&D did not form part of the contract. This would have obliterated claims in Construction and many areas of Software and Engineering where work is driven by client demand and engagement.
HMRC has clarified that the ‘decision-maker’ or the company bearing the risk will be eligible for relief. In practice, this means that claims can be made as long as the R&D does not form part of the contract. If contracted specifically to undertake R&D, the client may be able to claim. Of course, grey areas will still exist and need to be looked at on a case-by-case basis, however, this seems to be a far more pragmatic approach in ensuring the correct company is making a claim.
It remains to be seen if HMRC will continue its aggressive stance against such cases in the interim period or if it will begin to accept arguments in line with the new clarification to be implemented.
Subsidised / Grant Funded Projects:
Another positive is the inclusion of costs for Grant funded projects, and other subsidised work in full. This is a welcome U-turn which we believe will help stimulate growth. Previously, companies could not claim within the SME scheme for grant-funded projects – although these costs could be included under the less generous RDEC scheme. The budget had clarified that for both the new RDEC and the R&D intensive SME scheme costs can be included in full.
This is a welcome boost for companies who seek grants (often for innovation), that under the draft legislation would not have had to pick between receiving a grant and receiving R&D relief.
Subsidised / Grant Funded Projects:
Loss-making R&D-intensive SMEs will still be able to claim under the current scheme, albeit with an enhanced rate of cash credit. It seems strange that the Government is carrying on with the legacy mechanism rather than simply offering an enhanced rate in the new scheme when they are trying to simplify the claim process for all.
The threshold to qualify as R&D-intensive has been reduced from 40% to 30% of total expenditure which will enable more companies to claim under the R&D intensive scheme. One criticism of the old scheme was that the benefit rate varied depending on the taxable profit or loss and this has not been addressed. Whilst the benefit will be high for companies that incur big losses, it will decrease as losses decrease. In fact, it will be more beneficial to claim under the new RDEC scheme in some cases, which may mean it will be unclear in some cases which scheme is more beneficial until the Tax Computation is complete!
It is still disappointing that the overall benefit rate is lower than what companies experienced under the old SME scheme. However, we welcome the apparent softening of approach, particularly with regard to subcontracted and subsidised R&D, which should mean legitimate claimants aren’t unfairly punished.
Companies, particularly those on the threshold of being classified as R&D intensive, will need to ensure they are claiming under the correct scheme to maximise their benefit.
The Government has outlined that it will continue to work with the industry to develop support and will consider simplifications where possible before legislating in the Autumn Finance Bill.
What are the key changes to the UK R&D tax schemes?
Watch our R&D tax specialists take a deep dive into the nuances of the key changes announced in the Autumn Statement.
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