Introduction
The UK government is reforming Research and Development tax reliefs from April 2024 to simplify and improve the system. The changes include merging the RDEC and SME schemes into one scheme with a single set of qualifying rules. The goal is to provide the best incentives and support for businesses innovating in science and technology, while spending taxpayer money effectively. This concludes a review launched in 2021 to ensure the UK remains competitive for Research and Development and the reliefs are fit for purpose. Further actions may be taken to address high levels of non-compliance. The government will also continue developing enhanced support for R&D intensive SMEs and consider additional simplifications.
The Merged Research and Development Scheme
Contracted Out R&D
The objective of R&D tax reliefs is to boost Research and Development investment in the UK to drive productivity growth. It is important that relief goes to the company making R&D decisions and bearing the risk. The draft legislation allows the decision-making company to claim relief for contracted out R&D. This encourages collaboration and knowledge sharing. It also aims to enable relief where currently neither contracting company qualifies due to routine activities. Rules updated from April 2024 to apply consistently across regimes. Overall, the changes intend to incentivise R&D while ensuring taxpayer money is effectively targeted.
Subsidised Expenditure
The new contracted-out R&D rules make the current SME scheme rules on subsidised expenditure irrelevant. These sections will be removed before the merged scheme legislation is published. Under the new approach, receiving a grant or having R&D costs paid by another party will not reduce the relief amount a company can claim, subject to contracting out rules.
Externally Provided Workers
The government acknowledges that the previously published draft clauses implied there would be a double limitation on relief for externally provided workers (EPWs) from overseas. This was not their intent. The final legislation will make sure the rules simply remove relief for overseas spending on these workers, without doubly restricting it.
Step 2 Reduction
Like the current RDEC scheme, loss-making companies claiming the merged relief will have their payments reduced by a notional tax. This makes the benefit similar to what profit-making companies receive. Companies can offset the tax withheld against future tax bills.
The net payment amount will be calculated using the small profits tax rate (currently 19%) for loss-makers, rather than the main 25% rate.
Commencement
- The changes will apply for accounting periods starting on or after 1 April 2024.
- This delays the impact for most current RDEC claimants compared to the previous draft that would have applied the changes to expenditure from 1 April 2024.
- The delay gives businesses more time to prepare for the new rules depending on their accounting period cycle.
- It simplifies claims by avoiding needing to apply two regimes for periods straddling 1 April 2024.
- From 1 April 2024 onwards, there will only be two R&D schemes: the merged scheme and the SME intensive scheme.
Additional tax relief for Research and Development intensive SMEs
The R&D intensive SME scheme was announced in Spring 2023 for R&D expenditure from 1 April 2023. Originally, a company qualified as R&D intensive if its R&D expenditure was 40% or more of total expenditure.
The Autumn Statement lowered this threshold to 30% to expand access. The final clauses enacting this will be in the Autumn Finance Bill 2023.
Stakeholders raised concerns exceptional spending could skew ratios and cause instability in scheme qualification year-to-year. So continuity provisions were introduced, allowing companies qualifying one year to reclaim the next regardless of ratio changes.
Additional integrity rules were also added. These prevent manipulating intensity through short accounting periods or subsidy manipulation just to qualify.
Finally, legislation treating subsidised expenditure as ineligible will no longer apply from April 2024, further simplifying claims.
The detailed policy paper can be viewed here.