Autumn Statement 2023: What's in store for R&D tax credits
The two R&D tax credit schemes have undergone many changes in recent years to optimise opportunities for eligible businesses that are innovative pioneers in their industries, whilst preventing fraud and abuse of the scheme. The Autumn Statement 2023 was no exception to this with the announcement of R&D tax credit changes in 2023 that will be legislated in the Autumn Finance Bill. In this article, we will dive into the changes to R&D that were announced on Wednesday the 22nd of November by Chancellor of Exchequer, Jeremy Hunt, so you’re prepared for future claims. Let’s break down these changes that you need to know that the government will legislate in the Autumn Finance Bill. The information we’ll provide will help you prepare for these upcoming changes.
RDEC and R&D SME scheme are now combined
It can be argued that the biggest R&D tax credit change in Autumn Statement 2023 was the merging of the Research and Development Expenditure Credit (RDEC) with the R&D tax credit scheme for SMEs. Each of these has had its own defined eligibility criteria, and different rates depending on the size of the claimant, with RDEC known as an above-the-line benefit and the SME scheme as a below-the-line benefit.
With this change, all R&D tax credits are above-the-line credit. This means the tax benefit is deducted from gross income to calculate adjusted gross income, providing a benefit irrespective of a taxpayer's itemized deductions or standard deduction. Businesses can claim for R&D expenses including subcontracted R&D, while incorporating the enhanced Small and Medium-sized Enterprise scheme and limiting PAYE and National Insurance contributions. It also involves limitations on the tax relief for expenses incurred abroad, which will be applicable for accounting periods starting on or after April 1, 2024.
How will this impact businesses?
Businesses will hopefully experience less confusion when claiming R&D tax credits with one unified scheme with the same qualifying rules regardless of the company's size.
The rate has been unified changing what SMEs can gain from R&D
Drilling down into the details of the new unified scheme, a big change is that the R&D tax relief rate, for all businesses, is 20%. This helps SMEs receive a boost after they've experienced a drop in what they can retrieve in previous years. Essentially, for each £1 spent on qualifying R&D expenses, you can be credited 20p. This credit is treated as income and therefore is subject to corporation tax because it’s an above-the-line benefit.
The rate for loss-making companies
Loss-making companies involved in R&D will now face a reduced tax rate of 19%, as opposed to the current 25% rate in the RDEC scheme, providing them with a lower tax burden when claiming R&D tax relief.
More inclusivity in the scheme with a change to the threshold
Prior to the R&D tax credit changes in 2023, to be considered R&D intensive and therefore qualify for the tax relief, you needed to have spent at least 40% of your total expenses on R&D.
There is now a lower intensity threshold. It has been reduced to 30%, meaning you can spend a smaller proportion on R&D and still benefit from R&D tax credits.
Introduction of a grace period
Once these changes are implemented, there will be a one-year grace period. If a company qualifies for the increased support but doesn't meet the 30% intensity threshold in the following year (perhaps due to unforeseen events or a one-time situation), it can receive the enhanced support for that year, provided it meets the remaining criteria.
Higher payable credit rate for eligible SMEs
Commencing on April 1, 2024, small and medium-sized enterprises (SMEs) that are not profitable but are utilising the current R&D tax relief for SMEs will qualify for an increased payable credit rate of 14.5%, provided they satisfy specific criteria to be categorized as "R&D intensive”.
Nominations and assignments for R&D tax credit payments will be prohibited
To reduce the risk of fraud, the utilisation of nominations and assignments has been limited. HMRC wants to be more involved with the companies who claim as opposed to the person who is nominating the company for R&D tax credits. This isn’t the case when a company assigns its right to receive the tax credit to someone else.
Stopping payments to third parties
The Autumn Finance Bill 2023 will stop the practice of a third party receiving the tax credit payment so the payment goes directly to the company. While there are a few exceptions to this, HMRC will only release the tax credits when they are able to pay it directly to the company.
This applies to subcontractors: in the merged scheme, a subcontractor engaged in direct R&D activities for another company won't be eligible to seek R&D tax relief. The responsibility for making the claim rests with the principal company that initiates and oversees the R&D project.
When will these R&D changes be implemented?
The reforms will commence from 1st April 2024 for the new accounting period.
Who is impacted by the Autumn Statement 2023?
The government has recognised who benefits from R&D and who doesn’t which is why the R&D tax credit changes in 2023 will make a big impact on the claiming processes for the better. The purpose of these changes is to support businesses because through this support, our economy can grow and innovation can flourish. Not only do they simplify R&D for everyone, but loss-making companies will receive a more generous sum of credit and the pressure is lessened on what proportion of expenditure is related to R&D.
R&D tax relief is a changing landscape as the government continues to tackle fraud and increase the benefits of this scheme for innovations across the UK. The key R&D tax credit changes announced in the Autumn Statement 2023, are:
The two R&D schemes have merged into one.
There is now a unified rate of 20%, regardless of the company’s size
The tax rate for loss-making companies has changed to 19%.
There is a lowered intensity threshold for the proportion of expenditure on R&D; it has been reduced to 30%.
A one-year grace period has been introduced to help companies who didn’t meet the 30% intensity threshold in a subsequent year.
How does Alexander Clifford help you?
An R&D tax claim will always be strengthened with the expert eyes of an R&D tax credit specialist. The Alexander Clifford team can streamline your claim for you, speeding up the process of receiving the tax credit while ensuring you’re aligned with the latest evolutions to R&D legislation. Any questions about how these changes impact your R&D tax claim? That’s why we’re here! Contact us for a free consultation today.
