New merged R&D regime to go ahead from next April – Autumn Statement – November 23

Within the Autumn Statement the Government announced reforms to the R&D tax reliefs to simplify and improve the system from 1 April 2024. This will be legislated for in the Autumn Finance Bill (with legislation expected next week).

Our takeaways

1. Large companies will be able to claim for UK subcontracted R&D (no longer restricted to R&D subcontracted to qualifying bodies/universities). This will be great news for some.
2. The R&D credit benefit for SMEs will reduce from c.19% to 15%/16.2%. Bad news for many.
3. The R&D claimant will be the R&D ‘decision maker’ and ‘risk taker’ with various situations accommodated. We are pleased that Bright R&D’s representations seem to have been taken on board. Care will be needed when structuring contracts to understand the impacts and optimise the claim position though – we hope companies have enough time to do this.
4. Loss making R&D intensive SMEs (spending 30% or more of total spend on R&D) will continue to benefit from a 27% credit. This flies in the face of the simplification aims and seems to apply to a (vocal) minority only.

The key headlines are summarised below, including some intelligence from a discussion with HMRC this morning.

Key headlines

1. All changes will come into effect for accounting periods starting on or after 1 April 2024 (avoiding claims falling into both the old and new regimes).
2. There will be a single merged ‘above the line’ regime giving a gross 20% R&D Expenditure Credit. After tax, large profitable companies receive a 15% net benefit (no change). The technical note suggests the small profits rate, currently 19% will be applied to loss making companies, giving a slightly higher net benefit of 16.2%. HMRC have said that they are content that this doesn’t cause a wider accounting problem (there was a concern back in 2013 that RDEC might not be recognised as an ‘above the line’ credit if not all claimants receive the same benefit).
3. For subcontracted R&D, the headline is that HMRC has listened to stakeholder feedback, including from Bright R&D, and plans to legislate to ensure many scenarios are catered for. The principle adopted is that the “decision maker” is allowed to claim for contracted out R&D (as this is thought to promote knowledge sharing and collaboration). The technical note sets out a few helpful scenarios, as follows:
   1. Where a company with a valid R&D project contracts a third party to undertake some of the (qualifying) work connected with their R&D project, the company may claim the relevant (qualifying) costs of that contract. The company contracted to do that work may not claim for R&D activities which delivers the project outcome for another company’s project.
   2. If a company is contracted to do work for another company, but the work does not form part of R&D for the customer and was instead initiated by the contractor, then the contractor may be able to claim relief for their work, if they meet the requirements of having valid R&D which is otherwise eligible for tax relief. This is considered an essential element.
   3. Contracted R&D carried out by subcontractors who are working for non-UK corporation taxpayers, such as overseas companies, will continue to qualify for relief.
   4. If a company is contracted to provide a product or service which is not R&D, such as constructing a building or a software product, if they undertake R&D in delivering that product or service, they would be able to claim relief even though they are undertaking R&D on an activity contracted to them. The exact details of who should claim the relief will depend on the specific contract.
4. Subsidised R&D, for example partially grant funded can still be claimed, we believe based on the gross expenditure incurred.
5. Overseas subcontractor and Externally Provided Worker R&D expenditure will not qualify unless it is ‘qualifying overseas expenditure’, broadly defined as R&D that cannot be undertaken in the UK, as per the draft legislation issued in July.
6. Whilst overseas subcontractor/EPW expenditure will not qualify for RDEC purposes, HMRC has said that this will still be treated as ‘good’ expenditure for patent box R&D fraction purposes. This was a problem we flagged to them in September that they plan to resolve within the final legislation that we should see next week.
7. Reading between the lines, contributions to universities/qualifying bodies in respect of independent R&D may no longer qualify (but subcontracted R&D would). Bad news for our Universities.
8. An SME intensive scheme will apply for companies spending 30% or more of total expenditure on R&D (reduced from 40% to broaden its relevance). Provisions will be introduced to smooth companies qualifying for the regime in year 1 also qualifying in year 2 even if R&D spend falls below the 30% threshold.

The HM Treasury Technical Note can be found here: https://www.gov.uk/government/publications/autumn-statement-2023-research-and-development-tax-reliefs-reform

Do let me know if you have any questions or if it would be helpful to discuss what this means for you.