What do the 2024 changes to R&D Tax Relief mean for claimants?

It was confirmed in the Autumn Statement that the SME R&D Tax Relief (RDTR) and R&D Expenditure Credit (RDEC) regimes will be merged into a single R&D tax credit based on RDEC. Draft legislation has been released and will come into force for accounting periods beginning on or after 1 April 2024. This means that most companies are currently in their final period under the old regimes.

It was also confirmed that R&D intensive SMEs will continue to be able to claim an enhanced R&D tax relief based on RDTR, which will permit the tax deduction for their eligible R&D costs to be enhanced by an additional 86%. If this results in an R&D loss, it can be surrendered in return for a cash credit equal to 14.5% of the surrendered loss, an effective cash benefit of up to 26.97% of the qualifying R&D expenditure.

An R&D intensive company has been confirmed as one whose qualifying R&D expenditure accounts for at least 30% of its group’s total costs. This is a change from the original draft legislation, which had set a 40% test. What is more, a company will now only lose R&D intensive status if it fails to meet the 30% test for two successive periods, which will allow for some fluctuation in levels of R&D activity from year to year.

For non-R&D intensive companies, the combined RDEC will provide a tax credit of 20% on the company’s eligible R&D costs. This is a taxable credit, which means, when the company can offset the credit against its corporation tax liability, the after-tax benefit will be 15% of its qualifying R&D costs (i.e. after applying the main rate of corporation tax, which is currently 25%).

As in the current RDEC regime, a loss-making company will be able to surrender its credit in return for a cash payment from HMRC. In a welcome act of generosity, the Autumn Statement announced that the cash payment will be restricted by a notional tax amount of 19%, which is based on the current lower rate of corporation tax for small companies, rather than 25%, which was the rate in the original draft legislation. This means that the after tax cash available to a  non-tax paying company will be 16.2% of its qualifying R&D costs.

In another welcome move, the cap on the amount of cash credit that can be claimed will be calculated using the more generous rules from the RDTR regime rather than the current RDEC rules. This means that, unless the company qualifies for the IP-creation exemption from the cap, its maximum cash claim will be limited to £20,000 + 300% of its PAYE and NIC paid in respect of all employees for the year, regardless of whether or not they are engaged in the R&D, together with the PAYE and NIC paid in respect of connected party subcontractors or externally provided workers that are included in the claim.

There is more good news for claimants, as the new regimes remove two restrictions that have been particularly problematic. For periods beginning on or after 1 April 2024, there will no longer be a requirement to distinguish between subsidised and non-subsidised R&D expenditure, as it will be possible to claim combined RDEC (or R&D intensive SME RDTR) on all qualifying R&D costs, whether or not they are subsidised. This does not just apply to state aid funding, but will also simplify the position where a customer might be said to be subsidising a company’s R&D project.

Similarly, for periods beginning on or after 1 April 2024, the position for R&D performed under contract is simplified, so that the claim will be made by the company initiating the R&D. When a UK company contracts out an R&D activity, it will be able to claim for the payments to its subcontractor. If, however, the contract is for a non-R&D activity but the subcontractor decides it needs to carry out R&D in order to deliver the contract, it will be the subcontractor that claims the R&D tax relief. In addition, UK companies carrying out R&D activities under contract for overseas customers will continue to be able to claim UK R&D tax relief.

All in all, the 2024 changes are wide-ranging and will reduce the value of the reliefs for many claimants, but there are some welcome areas of clarification, and the changes announced in the 2023 Autumn Statement will go some way towards easing the transition for non-tax paying companies and R&D intensive SMEs.

For further details or advice, please contact Ann Minson (ann.minson@ensors.co.uk) or your usual Ensors tax contact.