The autumn statement contained a lot of nice sentiments in terms of supporting business. But for the important UK Tech sector the lack of anything new or helpful in relation to the direction of travel of the UK R&D schemes was hugely disappointing. The government have cut SME support and the introduction of RDEC for all from 1st April 2024 will represent a further cut if the current RDEC rate is adopted of 20% (Net 15% currently) of qualifying R&D expenditure.
The only R&D related news in the statement was:
https://www.gov.uk/government/topical-events/autumn-statement-2023
and also here:
“1.8 Research and Development (R&D) tax reliefs: merger of current small or medium enterprise (SME) and R&D Expenditure Credit (RDEC) scheme
As announced at Autumn Statement 2023,the government will introduce legislation in Autumn Finance Bill 2023 to merge the current RDEC and R&D SME schemes for accounting periods beginning on or after 1 April 2024. This will simplify and improve the system.
The rate offered under the merged scheme will be implemented at the current RDEC rate of 20%.
The notional tax rate applied to loss-makers in the merged scheme will be the small profit rate of 19%, rather than the 25% main rate currently set in the RDEC.
The tax information and impact note for this measure provides more information: Research & Development (R&D) tax relief reforms
1.9 Research and Development (R&D) tax reliefs: enhanced support for R&D intensive small or medium enterprises (SMEs)
As announced at Spring Budget 2023, the government will introduce legislation in Autumn Finance Bill 2023 to implement the enhanced support for R&D intensive SMEs, providing a higher rate of payable tax credit for eligible SMEs. Loss-making companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.
The intensity threshold required to qualify for this enhanced support will be reduced from 40% to 30% from 1 April 2024. A one-year grace period will also be introduced, enabling a company which has claimed successfully but which fails to meet the intensity threshold, for example due to a one-off shock, to continue to claim for the following period provided it meets the other conditions for the relief.
The tax information and impact note for this measure provides more information: Research & Development (R&D) tax relief reforms
1.10 Research and Development (R&D) tax reliefs: restricting nominations and assignments
As announced at Autumn Statement 2023, the government will introduce legislation in Autumn Finance Bill 2023 to remove the use of nominations for R&D tax credit payments (subject to limited exceptions). This will stop payments being made to third parties, with payments now going directly to claimants. The government will also legislate to prevent any new assignment (whether equitable or statutory) of R&D tax credits. HMRC will withhold payment until it is able to make payment directly to the claimant company. The change on nominations will take effect for all claims to payable R&D tax credits made on or after 1 April 2024. The restriction on new assignments will apply in relation to assignments made on or after 22 November 2023.
The tax information and impact note for this measure provides more information: Research & Development (R&D) tax relief reforms“
To put it mildly these changes could be viewed as confusing. It appears that the Government will merge the SME and RDEC schemes into one scheme based significantly on an argument about simplification. It is better to have one scheme with one set of rules. But it also appears that the SME scheme is being retained 1.9 for R&D intensive companies, so in fact the simplification which justifies point 1.8 will not happen. So it will remain as two schemes with two sets of rules. Surely the schemes could be merged with simply a different rate of RDEC for SME R&D intensive companies? The only reason I can see for not doing this is that under the SME scheme losses are surrendered for tax credits, so future tax relief is lost, while RDEC is a different mechanism where no future tax relief is lost (Notional relief is carried forward on the RDEC). So confusingly the R&D intensive scheme may not always be the best choice for R&D intensive SME, as they are losing loses which if they become profitable could be worth 19-25%. Under an RDEC style scheme the loses are kept. This is a complex point.
It could actually be argued that retaining the SME scheme with a higher rate of credit is cheaper for the Government than the new scheme because the RDEC credit is not linked to surrendering losses. Although clearly some “innovative”, although how innovative could be debated as commercial success is probably indicative of true innovation, never make a profit so the tax relief is not used.
I did receive another email from HMRC help and support about the Autumn statement it states the aims of all the reforms to be:
“In reiterating its commitment to make simplification central to tax policy development, the government has today set out the four objectives it is aiming to achieve when simplifying the tax system so that:
• tax rules have a clear consistent rationale and are easy to understand
• the burden of compliance and administration is proportionate for taxpayers and HMRC and it is easy for taxpayers to get their tax right
• taxpayers understand their obligations and options particularly at key lifecycle points, such as when they do something for the first time or infrequently
• tax policy does not unnecessarily distort the decisions of taxpayers and result in poorly informed choices “
These objectives are consistently not met around the R&D schemes by the Government and HMRC.
What is clear is that while the rate cuts which apply from 1st April 2023 and were announced in the 2022 Autumn statement decimated the value of R&D claims for loss making SMEs a more than 40% drop in some circumstances, in the 2023 Autumn statement the other shoe has dropped and profitable SMEs will face a similar cut under the merged scheme with an RDEC style calculation and 20% (Net 15%) benefit. The cuts implemented in 2023 slightly reduced the profitable (Tax relief) benefit from just under 25% of qualifying expenditure to just under 22% (Varies a bit as from 1st April 2023 we had more than one corporation tax rate depending on profit levels) but the merged schemes cut the benefit to 15%.
The devil will be in the detail. But if it is going to be the current RDEC rate of 20% (the statement says it will be) that will be a further cut for loss making SMEs and a huge cut for profitable ones, none of that helps investment in R&D and this autumn statement was supposed to be all about that. The Tories really need to think about this, but in strategic terms appear a shambles at present. This will damage SMEs.
The statement also fails to address the problems created for SMEs by HMRCs volume compliance approach and “reject and deny” attitude which makes it appear that claiming R&D Tax Credits might actually be more complicated and time consuming than actually doing R&D. This cannot be a good thing and certainly runs against the Governments 4 principles I quoted. This is a double whammy for SME claimants, and we have seen many accountants simply not wanting to touch R&D claims due to the negativity around them. The scheme is supposed to be positive/helpful for claimants. This is a crisis of the Tories making but they offer little in terms of solutions.
Christopher Toms MAAT MA – Compliance Director RandDTax