In a significant move, the Chancellor has confirmed the implementation of an R&D relief overhaul, scheduled to take effect from April 2024. This comprehensive transformation involves merging the existing R&D Expenditure Credit and SME scheme, streamlining the process for businesses. Notably, the intensity threshold for SMEs will be reduced from 40% to 30%, enabling an additional 5,000 SMEs to qualify for R&D tax relief.
Rates for companies operating at a loss will see a reduction from 25% to 19%, with thresholds adjusted accordingly from April 1, 2024. The calculation of R&D intensity by HMRC, comparing qualifying R&D expenditure to total spending, will now play a pivotal role in determining eligibility.
A one-year grace period is introduced to address concerns about potential negative impacts on companies falling below the 30% threshold, guaranteeing relief for the subsequent year. However, complexities arise with the reduction of the profitable businesses’ credit rate to 15%, while loss-making entities will face a higher rate of 16.2%.
The merger of the R&D Expenditure Credit and SME scheme aims to eliminate the current intricate transition process between the two. Notably, the ability for R&D claimants to nominate a third-party payee for the relief payment will cease, reinforcing a direct relationship between the claimant and tax credits. The changes are forecasted to cost £280 million annually in tax relief by the 2028-2029 period.
Despite the welcomed simplification, industry experts express concerns about potentially manipulating the 40% threshold for SME-intensive businesses. Questions about access, administration, and the timeframe for the merged scheme remain, raising uncertainties about how businesses can effectively navigate these changes. Critics also argue that the decision to proceed with the reforms from April lacks clarity and finalisation of rules, calling for more detailed guidance.
Rachel Moore, an innovation incentives partner at PwC, emphasises that while the merger simplifies the process, uncertainties persist regarding entitlement and potential winners and losers. Some businesses, especially those in subcontracting, may face challenges due to the impact on contracts governed by the new rules. The expansion of R&D relief for intensive businesses, lowering the threshold from 40% to 30%, is expected to benefit sectors like life sciences and high tech.
In a broader context, the government’s commitment to R&D investment, highlighted by a £750 million allocation this year, reinforces its dedication to maintaining the UK’s position at the forefront of science, innovation, and technological advancement.
