Autumn Statement 2023 - Research and Development (R&D) tax relief changes

Research and Development (R&D) tax relief has been under the review by the government for a number of years, and the Chancellor’s Autumn Statement has confirmed the latest change. As had been signposted by previous announcements, from 1st April 2024 the two schemes that currently operate - one for small and medium companies (the SME scheme) and the other for large companies (the RDEC scheme) - will be merged into a single scheme which will be in the form of an above the line credit – similar to the current RDEC regime. There will, however, be a continuation of the old SME scheme, albeit the number of companies eligible for this will be reduced considerably.

Key changes 

The new combined scheme will apply the same R&D tax credit rate of 20% that applied to the old scheme. In effect, for every £100 of qualifying R&D expenditure, the company receives a tax credit of £20. However, it is worth noting that this credit is itself subject to corporation tax.

For loss making companies, the “deemed” corporation tax rate on the credit will be 19%, whereas profit making companies will suffer corporation tax at the main rate of corporation tax, being 25%.

In cash terms, this means that loss making companies that will receive be £16.20 for every £100 of qualifying expenditure versus £15 that will be received by profit making companies. 

For companies currently already within the RDEC scheme there is no negative affect of these changes, and indeed for loss making companies they are now better off as they now benefit from an increased cash credit, however for those who previously made R&D claims under the SME scheme, they will see a dramatic reduction in the cash benefit who would currently receive a £21.50 cash benefit, or as much as £24.70 for expenditure prior to 31 March 2023.

Qualifying expenditure 

Historically, there has always been a slight difference between the eligible costs that can be claimed under the old RDEC and SME schemes. As the schemes have not been merged, there has also been changes to the costs which are eligible to be included in a claim. These mainly relate to sub-contracted R&D expenditure, and companies which rely heavily on sub-contractors are likely to find their claims much more restricted than in the past. For any company that is looking to involve sub-contractors in their R&D activities, we recommend advice is sought prior to entering into the contract to ensure that the terms do not jeopardise the ability to make a valid R&D claim.

Additional tax relief for R&D intensive companies 

It is not all bad news for SMEs, however. From 1 April 2023 the concept of a knowledge intensive company was introduced. This is effectively a company whose qualifying expenditure made up at least 40% of the Company’s total expenditure for the respective accounting period. 

From the 1st April 2024 the 40% threshold will be reduced to 30% of the overall expenditure incurred by a company. 

For those companies meeting this threshold, the old SME scheme will still be available – although this will be a complex area to ensure the correct conditions are met, and we would expect HMRC to be examining these claims with great scrutiny.