The Autumn Statement 2023 confirmed that the merger of UK Research & Development Tax Credit schemes will go ahead as early as next year. This change will be legislated in the Autumn Finance Bill 2023. But what does this mean for Small and Medium Enterprises?
I think it’s fair to say that the biggest impact is already being felt, given that in order to line up the value of the two schemes, the SME scheme was significantly reduced for all R&D expenditure from 1st April 2023, while the RDEC scheme which has applied to large companies (over 500 employees) was uplifted.
All Under RDEC for accounting years starting on or after 1st April 2024
As expected the two scheme will be merged under a ‘simplified’ RDEC scheme, which provides an above the line credit of 20% i.e. 20% of your eligible R&D expenditure is added to company income and forms part of the company’s trading profits. As such it is taxable, so the net benefit is 15% of R&D costs – 15p for every £1 spent (the notional tax rate under RDEC is set at 25%).
Some of us hoped that the Autumn Statement 2023 would bring news on an improvement to the claim rates for SMEs, once they come under RDEC. While there was some good news for ‘R&D intensive companies’ (see more below) nothing else was changed, which means a further erosion to SME claim rates under RDEC.
For profitable SMEs claiming under the merged RDEC scheme, because of the change in how the benefit is calculated: at the 25% tax rate the claim value goes down from 21.5p per £1 spent; and at the 19% tax rate down from 16.4p per £1 spent – to the REDC rate of 15p per £1 spent on R&D.
Loss making companies can still receive a cash payout, under certain circumstances, but first the credit is used to discharge any corporation or other tax liabilities and there is a cap on cash payments that is linked to PAYE and NI taxes paid by the company in the relevant claim year.
R&D Intensive SMEs get a boost but at the expense of simplification!
R&D intensive SME companies are given special consideration and will enjoy higher claim rates, which is good news, except that it means that the aim of simplifying everything under one scheme is not really achieved, as there are still two schemes!
1. the merged scheme
2. SME intensive scheme
In the spring budget R&D intensive company were classified as loss making companies where more than 40% of total annual expenditure was spent of qualifying R&D. This will now reduce to 30% of expenditure meaning more companies will qualify as ‘R&D intensive’. The claim rate for these companies will be around 27p for every £1 spent on R&D.
Some rules to prevent manipulation of expenditure in ways that might skew a SME’s R&D intensity ratio will be announced.
Subsidised expenditure
Before the merger SMEs had to claim subsidised R&D under the RDEC scheme which has historically been much less generous than the SME scheme. This included any grant funded R&D and also R&D undertaken as a contractor for a large company. Large companies therefore, in most cases, could not claim the costs of any R&D work they subcontracted out to another company. SMEs undertaking grant funded R&D could also not claim any subcontractor costs. With the merged scheme this is changed. In summary the change is that:
• Where a company that is undertaking a qualifying R&D project contracts a third party to undertake some of its R&D project, it can claim the costs of its subcontracted R&D.
• Where a company elects to do R&D, whether or not as part of delivery of an non R&D contract for another company, or as part of a grant funded R&D project, it can claim its R&D costs, including any R&D work it subcontracts to another company (as outlined above).
This change does mean that SMEs that are subcontracted to undertake R&D on a large company’s R&D project, will no longer be able to make an R&D claim for work done under that contact. But SMEs undertaking grant funded R&D and those doing R&D to deliver a contact (where that contact is not an R&D contract) will be able to claim all their R&D costs, including their subcontractor costs.
Read HMRC technical information on the proposed merger.
To ask a question or find out whether you qualify for R&D tax relief – contact the author.