On 22 November 2023, the Chancellor of the Exchequer, Jeremy Hunt, proclaimed his Autumn Statement as “the biggest ever boost to business investment”. We’ve taken a look behind the headlines to highlight the key announcements for innovative businesses of all sizes.
Merged scheme start date confirmed
The Autumn Statement confirms that a merged scheme for R&D tax relief will be introduced for accounting periods beginning from 1 April 2024. This marks a change from the draft legislation published in July 2023, which would have applied changes to expenditure incurred on or after 1 April 2024.
The change simplifies the changeover for businesses, with no need to claim under different regimes for an accounting period that straddles 1 April 2024. It will also delay implementation of the merged scheme for some businesses.
More beneficial effective rate for loss-making companies
The notional tax rate for loss-making companies of all sizes will be lowered in the merged scheme. Under the current RDEC scheme, notional tax at the main Corporation Tax rate (25%) is deducted for loss makers before the RDEC is payable. Under the merged scheme, this deduction will be at 19%.
* For accounting periods starting on or after 1 April 2024, the R&D intensive threshold falls from 40% to 30%.
Lower threshold for R&D intensive SMEs
Despite talk of a single scheme, two separate incentives will remain in place, with the continuation of the enhanced rate for R&D intensive SMEs operating under the current SME model. One significant change, however, is the lowering of the threshold for businesses to qualify for this rate. For accounting periods starting from 1 April 2024, businesses spending 30% or more of their overall business expenditure on R&D will qualify.
Despite these developments, which are broadly positive, there will still exist a noticeable disconnect between the aspiration of the policy and its implementation. For example, a business with a fifth of its overall expenditure invested in R&D – a substantial commitment for any business – will not be considered R&D intensive by the Treasury under the new scheme.
The good news is that a one-year grace period will apply for companies who dip under the 30% threshold for R&D intensive SMEs, to avoid the scenario where a business would move in and out of the R&D intensive regime, creating uncertainty around financial planning and investment decisions.
R&D claimants will no longer be able to nominate a third-party payee
From 1 April 2024, companies claiming R&D will no longer be able to nominate a third-party payee for R&D tax credit payments, and with immediate effect no new assignments can be set up. This means that payments of R&D tax relief will be made directly to the company, reducing the risk of abuse by rogue agents and ensuring businesses receive a boost to their cashflow as quickly as possible.
A new definition for contracted out R&D
In a technical note setting out more details for the merged scheme, the government reiterated the objective of R&D tax relief. The note confirms the intention to increase the overall level of R&D in the UK economy by reducing the cost of investing in R&D and providing a counterbalance to the risk involved.
As a result, the merged scheme will direct relief to the company making the decision to do R&D, and bearing the risk. This interpretation will also apply to the R&D intensive SME scheme.
This is a welcome clarification, resolving uncertainty created earlier in the consultation process which suggested that relief would be directed to a customer instead.
Any major policy change is likely to create winners and losers. In this case, companies who carry out R&D on behalf of larger businesses currently claim under RDEC. They will not be eligible for relief under the merged scheme. The impact of this move, and lack of transitional provisions, on complex R&D supply chains does not appear to have been investigated.
Subsidised expenditure removed under merged scheme – and simplified for R&D intensive SMEs
The removal of restrictions on subsidised expenditure from the merged RDEC scheme avoids what could have been major disruption to many existing claims from larger businesses. The announcements go further by committing to tidy up the subsidy provisions for R&D intensive SMEs as well. As with subcontracted R&D, clarification here will be welcomed after a period of disruptive uncertainty regarding HMRC’s interpretation of subsidised expenditure.
The end of the road for R&D tax relief reform
The Autumn Statement announcements confirm the end of the consultation period on R&D tax reliefs, which kicked off back in March 2021. There are still many aspects of the technical design of the merged scheme to be confirmed when updated legislation is published, but no new material changes should bring some much needed longer term stability to R&D tax policy.
We hope that it does not signal an end to constructive engagement between HM Treasury, HMRC, industry stakeholders and businesses, as the merged scheme is finalised and implemented.
Full expensing made permanent
The decision to make full expensing permanent was a headline-grabber, but for many companies, the Annual Investment Allowance (AIA) will remain more beneficial. While full expensing delivers a 25% cash benefit to profitable companies on their investment in plant and machinery, this is matched by the AIA alongside a better rate for special rate items which fall outside the general pool. Although the AIA is capped at £1 million a year, the vast majority of UK business investment falls below this threshold making it a preferable option for many.
Businesses may want to review their approach to capital allowances as a result of the changes announced by the Chancellor, but it’s important they look beyond the headlines. Understanding how different asset classes, rates and allowances interact could uncover potential savings and free up funds for further investment.
Grant funding for innovators
Among a raft of funding announcements, highlights included an extension to the Future Fund: Breakthrough, which received at least £50 million of additional funding to help the UK’s most R&D intensive companies to scale up, and investment of £145 million through Innovate UK to support business innovation, including decarbonization, battery innovation and critical technologies.
Overall, there is plenty for businesses and their advisers to review, including several positive developments for innovative businesses. ForrestBrown’s team is ideally placed to help your business navigate these changes to the innovation toolkit.