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Guide To R&D Tax Relief Reform As UK Moves To A Merged Regime - Grant Thornton
Guide To R&D Tax Relief Reform As UK Moves To A Merged Regime - Grant Thornton
A RT I C L E
CONTENTS
Contracted-out R&D
Subsidised expenditure
The objective of the merged scheme is to simplify the UK’s research and
development (R&D) regimes by having a single set of qualifying rules. But with
little time until the single scheme is implemented, there's no respite for
businesses who'll need to act quickly to be ready for the changes.
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The merged scheme will broadly follow the existing R&D expenditure credit
(RDEC) rules. This means that all companies, including those who previously
claimed under the small and medium-sized enterprises (SME) scheme, will
benefit from the receipt of a 20% tax credit that can be recognised ‘above the
line’ as taxable income, providing better visibility in their accounts.
Under the existing RDEC scheme, a notional tax at the main rate of corporation
tax (currently 25%) is applied to the RDEC for loss-making companies. Under
the new scheme the rate will be reduced to 19%, accelerating the RDEC cash
benefit for loss-making businesses. The net RDEC benefit for loss-making
companies will therefore be up to 16.2% for every qualifying R&D £1 incurred
(compared with 15% for profitable companies).
However, the new merged scheme rates pose a disadvantage for SMEs overall.
The rates are lower than those in the existing SME scheme, which for
expenditure incurred from 1 April 2023 are between 18.6% and 21.5%,
depending on whether a SME is loss- or profit-making.
The Government has also confirmed that to protect the R&D-intensive scheme
for genuine loss-making R&D-intensive companies, new rules will introduce a
one-year grace period to apply where a company has fallen below the 30%
threshold in the following accounting period. This will help provide some certainty
to claimants where their spend fluctuates year on year, together with anti-
avoidance rules to prevent business from manipulating their intensity by using
short accounting periods.
Contracted-out R&D
A key concern following July's draft legislation was the proposed restrictions to
R&D contracted out to companies under the merged scheme, with businesses
seeking certainty and clear guidelines.
The Autumn Statement provided some welcome clarity with further detail
provided in the Finance Bill 2023-2024. It was confirmed that, under the merged
scheme, the intention is that the party that decides to do the R&D and bears the
risk should get the benefit from making a claim.
Specifically, the Finance Bill 2023-2024 states that where it's intended that a
contractor may need to undertake R&D activities as part of meeting the
obligations of a contract this would constitute contracted-out R&D. In this event,
the payments for the contracted-out R&D would be qualifying expenditure for
that person, ie, the person who contracted out the R&D to the other party. There
may, however, be exceptions where the contracted-out activities don't form part
of an R&D project, and R&D is instead initiated by the contractor.
When considering whether R&D has been contracted out, this is likely to be
determined by the unique contract terms and factual circumstances. This
underscores the increasing importance of reviewing and understanding contracts
before work begins in order to avoid overlooking the potentially available
benefits.
Subsidised expenditure
The Finance Bill 2023-2024 will remove the subsidised expenditure legislation
currently in place for the SME scheme (and that was proposed for the merged
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This simplification will apply to both the revised SME intensive and merged
scheme, which is favourable for those companies in receipt of grant monies or
other third-party funding. The contracted-out R&D rules above, however, will
continue to apply.
A number of measures have been brought in to tackle this, including the recently
introduced Additional Information Form (AIF) requirement for all R&D claims
made on or after 8 August 2023. It's clear, however, that many businesses still
aren’t fully aware of the impact of the AIF, with HMRC noting a 50% surge in
rejected claims in the four weeks following its introduction.
What is clear is that getting R&D tax claims right first time is paramount. At the
same time, it has never been more challenging for businesses than in this
environment of legislative change and high HMRC scrutiny, and the additional
changes announced above will only add to the administrative burden for all R&D
claimants.
The need to understand the new merged scheme mechanism for relief is likely to
cause some operational headaches for those not used to the RDEC scheme, so
it's essential for companies to work with advisers who are experienced in
preparing RDEC claims.
SMEs that wish to claim under the SME intensive scheme should look to
maintain historical evidence of their qualifying expenditure against the relevant
intensity thresholds. Those businesses that enter into arrangements with third
parties will also need to review these contracts in detail to understand how the
contracted-out rules may affect them.
With little time until the merged scheme is implemented, it's essential that the
Government provides sufficient guidance to support businesses in their
preparations – as, above all else, businesses need clarity and certainty to enable
effective planning on cashflows.
For more insight and guidance on preparing for these changes, please get in
touch with Lindsey Coplandor Ian Rowland.