29 January, 2024

Plans to significantly overhaul the current Research & Development (R&D) tax relief system were confirmed by the Government in November’s Autumn Statement.

These changes, primarily the introduction of a unified ‘research and development expenditure credit (RDEC)-like’ scheme, are set to substantially impact how businesses, especially small and medium-sized enterprises (SMEs), approach R&D tax credits.

At Waston Buckle we can provide assistance on any queries you may have about the changes to the R&D schemes. Contact us for more information.

Merged R&D tax credit regime

The new scheme, applicable from 1 April 2024, merges the existing R&D tax relief frameworks into a single system. Key features include:

  • Unified credit rate – A 20 per cent credit rate matches the current RDEC regime. This standardisation simplifies the process for all companies, regardless of size.
  • Benefits for profit and loss-making companies – Profit-making companies will see a net benefit of 15 per cent, while loss-makers will receive a slightly higher benefit of 16.2 per cent, calculated using the small profits rate of 19 per cent.
  • Subsidised R&D exclusions removed – The new scheme removes the need to reduce relief for subsidised R&D costs, a departure from the current SME regime. This change could increase the relief available for some companies.
  • Adoption of SME’s PAYE/NIC Cap – The more generous PAYE/NIC cap of up to 300 per cent from the SME regime will be adopted, benefiting larger entities. By contrast, the RDEC scheme limited businesses to claim just 100 per cent of their PAYE/NIC liabilities.
  • Changes in subcontracted R&D claims – The new rules will notably alter who can claim R&D tax incentives, especially for companies that subcontract a large portion of their R&D.

Subcontracted R&D rules under the merged regime

The subcontracting rules are perhaps the most significant change. Under the new regime:

  • If company X (the customer) subcontracts R&D to company Y (the subcontractor), it is company X that can claim the R&D expenditure.
  • If company Y initiates R&D as part of its own project, then company Y can claim, with company X having no claim.

These rules require a detailed assessment to determine the rightful claimant in each scenario.

For further guidance on these changes, Watson Buckle are here to help. Contact us today.

Special considerations for loss-making and R&D-intensive SMEs

The Government has made an exception for loss-making R&D-intensive SMEs:

  • The R&D intensity threshold is reduced from 40 to 30 per cent.
  • Eligible companies will continue to receive an 86 per cent enhanced deduction and a repayable tax credit of 14.5 per cent.
  • A ‘year of grace’ is available for those who temporarily fall below the threshold due to exceptional circumstances.

Preparing for the changes

Businesses must start preparing for these changes now:

Review current R&D activities – Assess how the new rules will impact your existing and planned R&D activities, especially if you subcontract R&D.

Understand the financial implications – Analyse how the changes in credit rates and benefits for profit and loss-making companies will affect your financial planning.

Stay Informed – Keep an eye out for further legislative details and guidance to fully understand the nuances of the new regime. Our expert R&D team can keep you informed, contact us for more information.

The overhaul of the R&D tax relief scheme marks the end of a cycle of changes which began in 2021. While these changes promise to streamline the process, they also bring a host of considerations that could be problematic if not handled properly.

Our R&D tax relief experts can advise you on these changes plus any other questions you may have surrounding R&D tax claims. Contact us today for support.